FX.co ★ EUR/USD: ECB's hawkish stance and euro's phlegmatic reaction

Following the May meeting, the European Central Bank (ECB) implemented the most anticipated "baseline" scenario, raising interest rates by 25 basis points and announcing further steps in this direction. Buyers of the EUR/USD positively reacted to this event but failed to overcome the resistance level of 1.1090 (upper line of the Bollinger Bands indicator on the daily chart). For two days, traders tried to test the 11th figure, besieging the price barrier at 1.1100. But in vain: neither the Federal Reserve nor the ECB managed to push the pair out of the 1.0960–1.1070 range. The results of the May meetings, by and large, did not bring any surprises, so market participants froze in anticipation of the next information triggers.

ECB's hawkish stance

In the run-up to the ECB meeting, discussions continued on the market about how much the regulator would increase interest rates—25 or 50 basis points. The very fact of raising was not discussed, given the previous rhetoric of Christine Lagarde and many central bank representatives. However, this rhetoric simultaneously made one doubt that the bank would limit itself to a 25-point increase. For example, the heads of the central banks of Belgium and Austria advocated the implementation of a 50-point scenario. Some other ECB representatives stated that at the May meeting, the Governing Council members would choose from two options (25 or 50) and, according to them, "each of these options has its own argumentation."

On the eve of the May meeting, the market determined the overall position: most experts leaned towards the implementation of a moderate scenario. In particular, 57 out of 69 economists surveyed by Reuters stated that the ECB would raise rates by 25 basis points. And only 12 respondents predicted a 50-point rate increase.

For this reason, traders reacted rather sluggishly to the results of the May meeting. Moreover, the market practically ignored the fact of the 25-point increase: the euro strengthened its positions on Lagarde's comments, who voiced hawkish theses.

The head of the ECB was again concerned about core inflation, although the April release showed a decline in the core CPI (for the first time in the last nine months). However, according to Lagarde, core price pressure remains strong (service prices are supported by deferred demand amid strong growth in this sector), despite the fact that the overall inflation indicator has been consistently declining in recent months. In this context, the head of the ECB reported that all Council members agreed on the need for further tightening, "and many of them even leaned towards raising the rate by 50 basis points."

The accompanying statement text also had a hawkish tone. In particular, the regulator pointed out that inflation in the eurozone would be too high for an extended period, so the central bank intends to make "further decisions taking into account incoming data and inflation assessment." It is also reported that the European regulator plans to stop reinvesting proceeds from maturing bonds under the Asset Purchase Program (APP) as early as July. Funds from the redemption of bonds under another program (PEPP) will be reinvested at least until the end of 2024.

Market Reaction

Reacting to the results of the ECB's May meeting, the EUR/USD pair once again jumped to the borders of the 11th figure, but the bullish momentum ran out at that point. The inability to consolidate above 1.1100 is due to several reasons. First, the outcomes of the May meeting coincided with the expectations of most market participants. Yes, Lagarde announced further steps towards tightening monetary policy, but the future pace of rate hikes will depend on many factors (primarily on the dynamics of core inflation). Therefore, the euro did not become a beneficiary of the May meeting "in the moment," including in the pair with the dollar.

In addition, pressure on the euro came from the data published today from Germany. According to the released report, the volume of manufacturing orders in March fell by 10.7% month-on-month compared to market expectations of a decline of 2.2%.

Meanwhile, the dollar received some support amid ongoing problems in the U.S. banking system. Shares of yet another American bank, PacWest Bancorp, plummeted 60% on news of its possible sale. The lender announced that it is in talks with potential partners about the sale of strategic assets, after which the bank's shares reached a record low level. Recall that just a few days ago, First Republic went bankrupt in the United States, becoming the third collapsed American bank in the last two months (after California's Silicon Valley Bank and New York's Signature Bank).

Against this backdrop, the safe-haven dollar received temporary support as a defensive instrument.

Conclusions

Neither the Federal Reserve nor the European Central Bank managed to unlock the prevailing situation for the EUR/USD pair. The price still (for the second week in a row) trades in the 1.0960–1.1070 range, reflecting the indecision of both buyers and sellers of the pair. Traders need a powerful information trigger to leave this price corridor.

Such a trigger could be the Nonfarm Payrolls, but only if the key components of the report differ significantly from the forecast estimates of most experts. Overall, the situation for the pair remains uncertain, so it is now advisable to take a wait-and-see position: Nonfarm Payrolls + the Friday factor can provoke strong volatility for the pair "in the moment," but these price fluctuations may not continue for the following week.