Will the euro put genie back in the bottle? Forecast as of 08.02.2022

The ECB president used to disturb the markets with her comments, and then she would try to smooth the situation and even sometimes apologize. So far, she has managed to control the euro-area bond market, but this time, the situation is different. Let us discuss the Forex outlook and make up a EURUSD trading plan.

Weekly euro fundamental forecast

Markets weren’t particularly convinced by Christine Lagarde, who said any changes in monetary policy would be gradual and data-driven. The ECB took a move on February 3, and any Lagarde’s attempt to set back the hawks will be treated with suspicion. Central banks will have to speed up monetary changes, and the Fed has already demonstrated its willingness to move on.

In her first speech since the ECB February meeting, Christine Lagarde tried to smooth over her recent hawkish comments. And there were reasons. Italian bond yields reached their highest level since April 2020, and their spread with German peers, a key indicator of stress in the euro-area bond markets, is the widest since July 2020. Greek, Spanish, and other euro-area bonds were being sold off. The bond market is adjusting as the ECB stops buying assets and moves on to its first rate hike for the first time in more than a decade.

The idea that high borrowing costs will hinder the euro-area economic recovery still concerns the ECB’s members. That’s why Christine Lagarde’s attempts to hold back market expectations seem reasonable. She has noted that the central bank does not see the need to rush to any premature conclusions. Even though the European inflation in 2022 will hardly return to 2%, its stabilization will lead to the start of the monetary policy normalization in the form of the QE tapering. The ECB president has made it clear that normalizing is not tightening.

However, her speech hasn’t much impressed the market. Yes, the European bond yields slightly decreased, but the same was in the US bond market, so the EURUSD bulls went ahead. Investors continue to discuss the ECB hawkish shift, and the euro speculative longs, having increased over the past six weeks, are still far from their highs recorded in 2017, 2018, and 2020. They have room to grow, especially if the euro-area domestic data improve.

The economic calendar this week has few events, and so, the EURUSD bulls will hardly start an attack. However, the bears, on the contrary, are full of enthusiasm to take advantage of the strong US inflation data for January. According to Bloomberg experts, it will accelerate from 7% to 7.3%, which will be the highest value since the beginning of 1982.

Weekly EURUSD trading plan

What’s next? According to Lagarde, the ECB will act slowly and patiently while the Fed is willing to speed up and take active steps. Nonetheless, five federal funds rate hikes are priced in the US dollar quotes, and the EURUSD drawdowns, if any, won’t be deep. Therefore, I recommend buying the euro if the price rebounds up from the supports at $1.14, $1.135, and $1.13.

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