10.03.202209:22 Forex Analysis & Reviews: ECB should not rush to change monetary policy, says Rehn

The European Central Bank needs time to properly assess the implications of Russia's military operation in Ukraine before continuing to withdraw support for the eurozone economy in a pandemic era. Bank of Finland Governor Olli Rehn said recently that no more stimulus is needed given the continent's robust recovery and the strengthening labor market. Instead, "prudence and optionality" are needed to ensure that premature tightening of monetary policy does not trigger a recession.

"The direction of normalization is still, in my view, appropriate. The economic recovery is relatively strong and employment is increasing. However, given the new situation, we need to take a moment of reflection as regards the speed and way of a gradual normalization of monetary policy," Rehn said in a recent interview.

At the moment, the futures market is only counting on a rate hike in March 2023, while most recently, the President of the European Central Bank emphasized a possible policy change as early as this year. Before today's meeting of the Governing Council, which is expected to be devoted to record high inflation, ECB policymakers should also assess the side effects of the Russian military operation and retaliatory sanctions imposed on the government of President Vladimir Putin.

The 5.1% price increase in the eurozone is more than double the 2% target. Many experts expect that price growth may accelerate, especially considering what oil prices are currently observed. All this will lead to a slowdown in economic growth in the eurozone countries, as well as excessive pressure on consumers. "In this kind of a situation, it's usually better to wait with your decisions until your sight clears so that you avoid doing damage," said Rehn, who belongs to the more dovish members of the Governing Council and has repeatedly warned against sudden changes in policy. "We would risk a slowdown or even a recession in Europe if we acted in a premature manner."

Geopolitical tensions, according to Rehn, delay rather than undermine the ECB's rejection of large-scale asset purchases and the introduction of negative interest rates. His Austrian colleague, Robert Holzmann, also recently said in an interview that the central bank is moving towards normalization, although the expected changes in ECB policy may be postponed to a later time. Mario Centeno from Portugal also supports the new policy direction, but warns of the possibility of stagflation.

In her recent speech, ECB President Christine Lagarde warned against jumping to conclusions, vowing that the ECB would "take all necessary actions" to ensure price and financial stability in the currency bloc.

As for the technical picture of the EURUSD pair

The euro is responding with growth to the expected data on inflation in the U.S., and traders are rapidly fixing profits. Although euro bulls have returned to resistance around 1.1100, which keeps the demand for a trading instrument, however, geopolitical tensions around Russia and Ukraine will limit the upward potential of the pair. Euro buyers need to consolidate above 1.1140, which will allow to continue the correction to the highs: 1.1230 and 1.1310. A decrease in the trading instrument will be met with active purchases in the 1.1000 area. However, the area of 1.0880 remains the key support level.

As for the technical picture of the GBPUSD pair

The buyers of the pound showed themselves after the recent major fall of the pair, and are now focused on the resistance of 1.3194. The return to control of this range will allow us to count on a more powerful correction of the pair in the area of 1.3240 and 1.3320. However, the prospects for growth are overshadowed by Russia's military operation on the territory of Ukraine. If we go below 1.3140, then the pressure on the trading instrument will increase. In this case, we can expect a repeated fall to 1.3085 and the exit of the trading instrument to new lows: 1.3030 and 1.2920.