Euro changes stick to carrot. Forecast as of 22.07.2022

Following the ECB July meeting, the EURUSD has been jumping up and down. Despite a 50-basis-point increase in the deposit rate, the lack of direct guidance is seen as indecision. Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

Every era has its heroes. Mario Draghi’s once authoritarian management style was essential to saving the euro. Today, he could not pass the strength test, even in Italy. Amid the current euro-area problems, a compromise is essential. And Christine Lagarde managed to bring the ECB policymakers to a consensus. The hawks got a half-a-point rate hike, and a transmission protection instrument or TPI calmed centrists. The EURUSD rose first and fell next.

The first increase in borrowing costs since 2011 comes against a very unfavorable background, including an energy crisis, a protracted war in Ukraine, political instability in Italy, and an approaching recession. Sure enough, with the euro-area inflation hitting 8.6%, the euro hasn’t looked that weak in the past twenty years. When the Fed is poised to raise rates by 75 basis points, or even 100 basis points, the ECB’s modest monetary tightening doesn’t impress investors. A deposit rate by half a point is quite a normal verdict. However, despite the central bank’s big move, the markets do not believe the regulator will stay determined.

In its short quarter-century history, the ECB has raised borrowing costs for the third time in a crisis. In 2008, it was during the global recession, in 2011 – during the euro-area debt crisis, and now, there is the energy crisis. The two previous cases ended with the ECB admitting its mistakes and monetary easing. What happened once may never happen again, but what happened twice will definitely happen a third time.

The lack of a clear plan also indicates the fact that the ECB may take a step back. Usually, after raising the rate, central banks hint at its growth in the future and, often, aggressively if they want to support their currency. Christine Lagarde limited herself to stating that inflation will remain at elevated levels also because of the euro’s depreciation against the US dollar, which increases import prices. It isn’t easy to expect a clear plan from the ECB president, who previously convinced the markets of the deposit rate hike by 25 basis points and raised it by 50 basis points instead.

The lack of guidance suggests the ECB will determine its next moves at future sessions. Given the euro area’s difficult economic and political environment, the ECB will stick to a gradual monetary tightening rather than an aggressive one. The derivatives market has lowered the expected value of the deposit rate, although it still believes in its growth to 0.5% in September.

Weekly EURUSD trading plan

Therefore, nothing has basically changed. The energy crisis continues, as well as the Italian political crisis. The ECB will act far less aggressively than the Fed. So, the EURUSD should go back to parity. Hold down shorts entered on the suggestion that the pair would not consolidate above 1.025 and add up to them on corrections.

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