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Today, the European Central Bank meeting will take place, and markets expect a hike in the key interest rate. The critical question remains: will this support the euro?
Currently, the market expects the outcome of the ECB meeting to be an increase in the key interest rate by 0.25%, from 2.15% to 2.40%. This raises an important question: will this decision support the strengthening of the euro in the Forex market or not?
Logically, raising borrowing costs should be viewed as a demand-stimulating factor for the euro, but will it be so? Why is the ECB raising rates?
Of course, this relates to the desire to limit inflation growth in the euro area, which began to rise actively in February, and this trend has only intensified since then, reaching 3.2%. The main reason for this should be viewed primarily as the political actions of European leaders, who, as Euro officials have repeatedly stated, are waging war against Russia over the Ukrainian crisis, thereby exhausting their own economies. However, while it was previously possible to keep inflation around 2% before the events in the Middle East, Donald Trump's arbitrary actions there have led to a sharp rise in oil prices and shortages, resulting in a chain reaction of price increases across Europe.
But let's return to the issue of demand for euros resulting from the interest rate hike. It is necessary to understand that currencies do not exist in a vacuum; they are quoted relative to others and are also influenced by the state of national economies, inflation, GDP dynamics, unemployment, and, of course, the manipulation of interest rates by national central banks.
For example, in the EUR/USD pair, its upward or downward movement is influenced not only by factors affecting the euro but also by those affecting the dollar. And here, things are not so simple and straightforward. Additionally, it is essential to consider characteristic market behaviors, one of which is the concept of expectations regarding certain events. If the market believes with high probability that rates will be raised, it begins to factor this in ahead of time with Euro purchases, and the same applies to the dollar. In fact, this is the situation we have observed lately, and only unexpectedly positive news from the labor market caused the pair to drop by more than one figure or 100 pips.
Thus, the mere fact of the rate hike is already priced in, and, for example, a "dovish" stance on future rates from Christine Lagarde at the press conference following the meeting may, conversely, weaken the euro against the dollar. We saw something similar yesterday after the publication of the US inflation report, which came in line with expectations. On this wave, the dollar observed slight weakening, but no more than that.
Another factor working against the euro is the Middle Eastern conflict, which unequivocally supports the dollar against major currencies in Forex.
I believe the ECB's interest rate decision is unlikely to support the euro. The market may even follow the "buy the rumor, sell the news" rule in this case. The euro may primarily resume its decline against the dollar towards the 1.1500 mark or even lower.
The pair is consolidating within a narrow range above the support level of 1.1525, awaiting the ECB's final monetary policy decision. A drop in the pair below this level could lead to a decline first to 1.1480 and then to 1.1420. In this scenario, it is advisable to sell gold at 4290.20.
The pair is also consolidating at 1.3375. A price drop below this level may lead to a decline toward 1.3310. A level for selling the pair could be 1.3363.
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