- It was expected that the US central bank would raise the interest rate by only a quarter of a point in light of a US-led banking crisis due to the course of tightening its policy.
- This made investors abandon the US dollar, and thus the opportunity was strong for the bulls of the EUR/USD currency pair to achieve strong gains during the session.
- Yesterday, the resistance level 1.0912 was the highest for nearly two months, before settling around 1.0870 at the time of writing.
German central bank chief Joachim Nagel said the European Central Bank is not done raising interest rates, according to an interview in the Financial Times. “There is still some way to go, but we are approaching restricted territory,” Nagel said. He also told the Financial Times that once the ECB stops raising interest rates, it will then have to resist calls to cut rates because doing so would enable “inflation to flare up again”. “There is certainly no mistaking that price pressures are strong and widespread across the economy,” he added. And “if we want to tame this stubborn inflation, we are going to have to be even more stubborn.”
For his part, Chief Economist Philip Lane said that the European Central Bank has not been too slow to raise interest rates, and stable inflation expectations are proof of that. Asked by former Bank of England policymaker Willem Buiter on Wednesday, the Irishman brought up previous episodes of rising borrowing costs too early to defend the eurozone’s monetary stance in the past year or so.
“The ECB and its observers,” Lane said at a conference in Frankfurt, “and there are two risk factors: being late in time, and also precautionary tightening when that actually turns out to be wrong.” And “the later thing — ‘OK, we saw inflation, so I conclude you’ve been too slow to walk that far” – I’d like to balance that with all those events in history where some central banks may have rallied too quickly.
That signal might include the European Central Bank itself, which raised interest rates unsuccessfully in 2008 and 2011 only for turbulent financial markets to force a reversal each time. The Frankfurt-based institution emerged last year as one of the last of its peers to abandon ultra-low borrowing costs, a policy Lin himself championed until he started hiking in July. His remarks may now be his most outspoken defense of that position yet.
Lane said the ECB’s current stance fits with that view, then noted that – as measured by one-year projections for borrowing costs and inflation – “we have strongly positive interest rates all over the horizon.” “If people thought we were going to continue to use very low rates with the rate of inflation that we have, that would have been a huge disaster.” And “the fact that we moved quite a bit I think was timely enough that we didn’t see a major destabilization of the outlook. And in fact, in recent weeks and months we have seen much more stability or convergence.”
According to the performance on the daily chart below, the bulls gained more control over the direction of the EUR/USD price. It surpassed the resistance level 1.0910, important for the change of direction. At the same time it moves the technical indicators towards overbought levels. The next resistance for bulls control is 1.1035, which paves the way for a bullish weekly closing.
On the other hand, and for the same period of time, if the euro / dollar does not get additional momentum, it may be subject to profit-taking sales, and the bears may return to controlling the trend if the currency pair moves towards the 1.0690 level today.
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