FX.co ★ ECB may return to zero rate by the end of the year

Demand for euro is increasing because the recent statements of ECB representatives hint at a possible change in monetary policy. This keeps EUR/USD above 1.0100, however, a challenging time lies ahead because the Fed is likely to tighten its policy, not to mention the eurozone could slide into recession because of everything that is happening in the world.

According to Governing Council member Pierre Wunsch, the ECB may raise deposit rates above zero by the end of this year if the Euro area does not experience a serious shock. This is despite the risk the ongoing military operation in Ukraine poses to the eurozone economy.

In terms of inflation, the data for March will be released today, and economists do not expect anything good from the report. In the best case, inflation will be at 7.5%, but many expect it to be around 8.0%.

ECB President Christine Lagarde already said back in February that the central bank is ready for a rate hike and a faster curtailment of bond purchases, and last week, she hinted that this may happen at the meeting this June.

There is growing speculation among economists and investors about how quickly rates will rise in the second half of this year, when the bond purchase program ends completely. Investors are betting that the deposit rate, which is currently -0.5% and negative since 2014, will hit zero this year. Some members of the ECB governing board even proposed to stop buying bonds at the end of this quarter and raise interest rates as early as July.

Meanwhile, Joachim Nagel is less aggressive, but also thinks the European Central Bank could raise interest rates early in the third quarter, provided that it stops buying bonds at the end of June. In such a case, the first increase will occur at the beginning of the third quarter of this year, which was also hinted by Lagarde. Nagel said that such a scenario would be in line with the expectations of investors who expect the ECB's deposit rate, which is currently at a record low of -0.5%, to rise to zero by the end of this year. He added that the frequency of rate hikes in the second half of the year will depend on economic data.

Technical picture of the EUR/USD pair

Euro continues to rally, thanks to growing expectations that the ECB will be more aggressive in terms of monetary policy. However, worsening geopolitical tensions due to Ukraine's refusal to negotiate will limit the upside potential of risky assets, which could lead to the return of pressure in the markets. If the Fed tightens further its policy, EUR/USD will undoubtedly see a decline.

To return the market under their control, euro buyers need a break above 1.0890, which will allow building a correction to the highs 1.0930 and 1.0970. But if the pair decreases below 1.0810, the quote will quickly slide to 1.0760 and 1.0720.

Technical picture of the GBP/USD pair

A lot depends on 1.3070 because its breakdown will lead to a further rise to 1.3100 and 1.3130. Meanwhile, a decline below 1.3040 will result in a dip to 1.3020 and 1.2990.