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Euro Talking Points

• This morning brought an ECB rate decision to the table at which the European Central Bank posed their largest ever rate hike of 75 basis points.
• The EUR/USD pair had an open door this morning for further gains, given the recent break of a falling wedge formation. That didn’t happen, however, as the meandering press conference that followed the rate statement was perhaps more befuddling than anything in the statement itself.

It was a big morning for the euro as the European Central Bank posed their largest ever rate hike of 75 basis points. This comes at a key time, as well, with the European economy staring into the abyss due to a number of factors, some of which are uncontrollable for the central bank.

The ECB’s statement itself was somewhat contradictory. The second paragraph of the statement says, "The Governing Council took today’s decision, and expects to raise interest rates further, because inflation remains far too high and is likely to stay above target for an extended period." This sounds hawkish.

And then the third paragraph – the very next paragraph – the ECB says, "After a rebound in the first half of 2022, recent data point to a substantial slowdown in euro area economic growth, with the economy expected to stagnate later in the year and in the first quarter of 2023." This sounds very dichotomous from the second paragraph.

The reality is that this highlights the fragility of the European economy, with inflation continuing to surge and growth remaining very weak. But – as the euro falls further, given the large amounts of imports coming into the economy, well, that inflation could go even higher as a falling euro makes products coming from the US more expensive on a relative scale.

This creates a potentially dizzying scenario for the European economy, and this morning’s rate decision and accompanying press conference seemed to do little to assuage fears.

There was one particular moment of note from Lagarde, when asked to defend the ECB’s prior forecasting errors, where she took on a defensive tone, saying "How do you model Coronavirus? The war in Ukraine? Energy blackmail? I take the blame, but we weren’t the only ones wrong."

This statement does not sound like she takes the blame. Instead it sounds as if she’s pointing to exogenous factors for why they have failed to address inflation until the Fed did (or tried to), which is what created that divergence in EUR/USD -- which created even more inflationary pressure down-the-road, as a falling currency contributes to higher prices.

What about that open door for euro strength? That hasn’t worked out well so far. The EUR/USD pair is now down on the day, but there is a shred of hope as price has been trying to settle support around prior wedge resistance.

EUR/USD Two-Hour Chart

Chart prepared by James Stanley; EUR/USD on Tradingview

Taking a step back, we can see why the current juncture on the chart is so important.

We’re still working around the parity psychological level even though there has been some breach. There hasn’t yet been a lasting drive below the big figure, and drawing back to the prior iteration of parity being in-play on EUR/USD, when prices were surging in 2002, it took about six months for the euro to leave that level behind.

Parity started to come back into play two months ago in the EUR/USD pair, but bulls haven’t yet been able to establish much by way of rallies, with the lone exception a trip up to trendline resistance that topped-out in early August.

The next couple of days of price action are going to be extremely important. While this ECB rate decision doesn’t seem to be the bullish driver that the technical backdrop was setting up for, it can often take time for everything that came out this morning to sink in. Case in point, look at the reactions from Jackson Hole which ran for much of the week after.

EUR/USD Daily Chart

Chart prepared by James Stanley; EUR/USD on Tradingview

EUR/JPY

The deck is loaded here. I looked into this on Tuesday, as yen-pairs were putting in massive breaks. The EUR/JPY pair was near-parabolic ahead of this morning’s rate decision, driven by the expectation for this 75 bps hike out of the ECB. The pair has gained more than 500 pips over the past couple of days.

But – as shown on Tuesday – price ran into a massive resistance level at 144.25. This price came in on three separate occasions in June to hold bulls at bay. And this morning, it came back into the equation and helped mark the high.

EUR/JPY Daily Chart

Chart prepared by James Stanley; EUR/JPY on Tradingview

From the four-hour chart, we can get a greater feel for just how strong prices have rallied of late. It was only on Tuesday that price action was finding support at prior resistance, around a prior trendline projection. That led to a massive leap with very little pullback to create that next resistance test. And at 144.25, we can see that level coming into play twice already today, most recently around the ECB rate decision which then led to a lower-low.

There is support potential around a spot of prior resistance, taken from around the 141.95 Fibonacci level up to the prior price action swing around 142.28.

If bulls hit this aggressively, there’s perhaps even a point of possible support around 143.00. But, given recent intensity in yen-breaks, there may be breakout potential here as well. Perhaps the sixth time will be the charm at 144.25 for bulls?

EUR/JPY Four-Hour Chart

Chart prepared by James Stanley; EUR/JPY on Tradingview

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