Buying EURUSD on high inflation in eurozone

17 April 2024 65
Buying EURUSD on high inflation in eurozone

According to European Central Bank President Christine Lagarde, the European regulator is moving closer to reducing interest rates.

Lagarde told CNBC yesterday that officials in Frankfurt are “observing a deflationary process” that is currently in line with expectations and should steadily return consumer price growth to 2% by mid-2025.


"Unless we have a major shock in developments, we are heading towards a moment when we have to ease the restrictive monetary policy that we have been pursuing," she said. "That will probably happen in the 'reasonably short term'."

The statement came just five days after the ECB reinforced expectations that interest rates will be cut in June as inflation falls. It would be the first cut since the ECB ramped up borrowing costs to cope with runaway price rises and, with the U.S. economy still in crisis, it is likely to precede similar moves by the Federal Reserve.


By contrast, economic growth in the 20-nation eurozone has been virtually stagnant for more than a year, which helped contain price hikes. Officials in Frankfurt are increasing confident of hitting the 2% inflation target in the coming months as tight policy restricts lending and slows wage growth.


Speaking earlier on Tuesday, Irish central bank governor Gabriel Makhlouf and his Finnish counterpart Olli Rehn confirmed that a rate cut is likely in June.

Lagarde did not comment on how many reductions in borrowing costs might occur in the coming months.

It's worth noting that economists surveyed by Bloomberg predict three rate cuts in 2024.


And since the inflation rate is the main reference point in choosing the future scenario of the eurozone monetary policy, all attention of EURUSD traders today should be paid to the upcoming publication of consumer price indices in the eurozone.

From a technical point of view, EURUSD looks oversold and set for an upward correction to around 1.0680.

Therefore, it is more appropriate to consider the scenario of EURUSD strengthening. The trigger for the pair growth may be a situation in which inflationary pressure in the European economy shows high values, i.e. CPI indicators of the eurozone come out above the forecasted values.


In this case, if the eurozone consumer price index (year-on-year) comes out above 2.5%, it will probably push EURUSD up.


The final recommendation is to buy EURUSD provided that the March eurozone consumer price index (year-to-date) is above 2.5%.

 

Profits should be taken at the level of 1.0680. A Stop-Loss could be set at the level of 1.0570.

The possible loss should not exceed 2% of your deposit funds.

 

This content is for informational purposes only and is not intended to be investing advice.

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