As the economic situation in the Eurozone worsens, the voices of the ECB "hawks" grow louder—a paradox. However, according to the OECD, the European Central Bank should continue to tighten its monetary policy to prevent inflation expectations from anchoring. The risks of doing so outweigh the danger of harming the currency bloc's economy. Will there be a rate hike in September?
In reality, the statements from the OECD are recommendatory. The Paris organization is not responsible and can say anything. The final decision remains with the ECB, which must take into account both the still-high inflation and the significant slowdown in business activity.
Dynamics of European inflation
Meanwhile, the voices of the ECB "hawks" are becoming increasingly prominent. Peter Kazimir, the head of the central bank of Slovakia, believes that the European regulator needs to raise borrowing costs once again. Only in this way can it ensure that inflation returns to the 2% target. His colleague from the Netherlands, Klaas Knot, notes that markets are predicting a 25 bps rate hike to 4% in September. However, they underestimate the chances of such an outcome.
Thus, in addition to Germany, Austria, Belgium, and Latvia, Slovakia and the Netherlands have added their voices to the previously announced intention to continue the cycle of monetary tightening. In contrast, Italy and Portugal are against it, and France keeps all options open.
The Bundesbank is especially surprising, as the fastest decline in production orders in Germany since the pandemic could be a restraining factor. The indicator in July fell by 11.7%, significantly exceeding Bloomberg experts' forecast of -4.3%. It seems that the German economy is still far from exiting the woods.
Dynamics of production orders in Germany
Nordea is considering three possible outcomes for the ECB's September meeting. In the first, the central bank raises rates and hints at further increases. This is the least likely scenario. In the second case, Christine Lagarde and her colleagues tighten monetary policy but talk about raising the bar for future rate hikes. In this scenario, EUR/USD will strengthen only briefly.
Finally, in the base scenario, the European regulator takes a pause but leaves the door open for future decisive steps. In this case, after some decline, the euro will start to regain its lost positions against the U.S. dollar.
A correction in EUR/USD is quite likely; the question is whether the "bulls" will wait until September 14th. According to ING, the U.S. dollar is overvalued against G10 currencies. Scandinavian currencies are the cheapest, with the pound being undervalued by about 1%. This could result in selling USD pairs in the event of worsening macroeconomic statistics in the United States.
Technically, on the daily chart, EUR/USD is showing signs of a reversal in the "bullish" trend thanks to the Three Inside Up pattern. Breaking the support at 1.071 will allow for the expansion of previously formed shorts with targets at 1.066 and 1.0595.