"A rate hike is possible in July", ECB Vice President Louis de Guindos said on Thursday morning, adding that "it will depend on the data coming in". In his opinion, "Eurozone inflation is close to peaking" and "there is no reason why APP purchases cannot end in July".
Euro strengthened sharply after the speech of Louis de Guindos. The EUR/USD jumped to 1.0936, a 10-day high at the start of today's European session. The euro also strengthened in the main cross-pairs.
The opinion of members of the Governing Council of the ECB was probably also affected by macro statistics published on Wednesday, according to which the German producer price index accelerated to 4.9% in March (30.9% in annual terms from 25.9% in February), then as the forecast assumed growth of +2.6% (+29.1% in annual terms). Following the release of the data, ECB Governing Council members Martins Kazaks and Joachim Nigel also called for an interest rate hike in July, according to media reports.
Statistics released today (at 09:00 GMT) also pointed to an acceleration in the annual consumer inflation rate in the Eurozone, which is another evidence of increasing price pressure, including due to strong consumer demand, rising energy prices and disruptions in international supply chains.
According to data released today by Eurostat, the consumer price index (CPI) rose by 2.4% in March (against a preliminary estimate of 2.5%) and by 7.4% (in annual terms) after rising by 5.9% in February.
Thus, the annual inflation in the Eurozone accelerated again, reaching a historical maximum, although it turned out to be slightly lower than the preliminary estimate. Energy prices continue to rise against the background of the military conflict in Ukraine, which contributes to further acceleration of inflation (in March, energy prices rose by an average of 44% compared to March of the previous year).
However, among the Board of Governors of the ECB, as follows from their comments, there is no consensus on the possibility of a faster pace of monetary tightening. Thus, the head of the ECB, Christine Lagarde, recently confirmed the presence of additional risks for the region's economy, including due to the ongoing military crisis in Ukraine, saying that “the longer the conflict lasts, the higher the economic costs will be, and the more likely it is that we will find ourselves in more unfavorable scenarios”.
Today, market participants will pay attention to the latest data on consumer confidence in the Eurozone (they will be published at 14:00 GMT). Consumer confidence in the Eurozone is expected to weaken significantly in April. The index fell to -20 after -18.7 in March and -8.8 in February. Such data are comparable to the values in the first wave of the pandemic. Since the creation of the single European currency, the fall in March to -18.7 from -8.8 in February was the second largest decline in this indicator. Now, an even greater decline (to -20) is expected.
As we noted in our 20/04/2022 review, “the euro could come under additional pressure if the second round of voting in France (April 24) ends with Marie Le Pen winning. Macron's widely anticipated victory could probably reassure the markets somewhat. However, it will not be a turning point in the dynamics of the euro, which will be prone to further weakening, including due to the above factors (further deterioration of the geopolitical situation in the Eurozone and the rapid growth of inflation).”
All this (falling consumer confidence, significantly accelerated inflation amid inaction of the central bank and the unstable geopolitical situation in the Eurozone) are extremely negative factors for the European currency.
Probably, its current growth provides an excellent opportunity to build up short positions on it, including in pair with the dollar.
At the time of writing this article, EUR/USD was traded near 1.0918, down slightly from today's high of 1.0936. In our main scenario, we expect the pair to resume its decline. Following this scenario, we would enter short positions at current prices with an additional pending sell order (Sell Limit) near today's local maximum of 1.0936 with immediate targets near 1.0850 and more distant ones near 1.0765.