Key Takeaways:
- The European Central Bank takes an aggressive approach to curbing inflation.
- ECB President Christine Lagarde shares serious concerns about countering inflation.
- Euro bulls may rethink their cautious approach in the weeks ahead.
The European Central Bank (ECB) took aggressive steps to curb inflation with last week’s 75 basis point rate hike. It was only this past July that the ECB raised rates by 50bps. Another large increase equaling the 75 bps move is unlikely as the Central Bank wants to see how these two hikes affect the economy.
To be certain, more rate increases are coming, but not so much at one time.
In many ways, Europe mirrors similar economic problems the United States faces. Gasoline and food costs are high, as well as soaring energy concerns. However, ECB Governing Council members feel the energy and food prices will ease over the next few months.
ECB President Lagarde Ready For Anything
On the other hand, although ECB President Christine Lagarde shares pleasant thoughts with her counterparts, she is quoted as saying that she wants “all economic actors to understand that the ECB is serious about countering high inflation.”
Lagarde is taking an assertive approach with a month-to-month view not to overreact.
When talking to reporters in Frankfurt, Lagarde said, “If the data on our meeting-by-meeting exercise review suggests that we should take a high hike of our interest rates, we will do so.”
However, after reporters asked her how many interest rate decisions would be made, she added, “it’s probably more than two, including this one, but it’s probably also going to be less than five.”
Where the EU suffers more deeply than the US is the Russia-Ukraine war. Russia shut down the Nord Stream 1 gas pipeline. The shutdown has put Europe in a difficult position. Immediately after Russia announced the shutdown, electricity prices shot up 10%.
The ECB raised its outlook for consumer prices for the remainder of this year and into 2023; as of now, a 0.9% growth is projected.
EUR/USD Trading
Looking at the battle of parity (1.00) between the Euro and US Dollar, there has been a one-month battle between bulls and bears, with bears having the advantage. However, recent ECB interest rate hikes may now turn favor the bulls.
Bullish traders need to push a little higher to gain momentum. Whether they want to push or continue with caution remains to be seen.
