ECB’s policymaker suggested that interest rates for the Euro Area are still not that high compared to inflation. What could this mean for the Eurodollar?
More rate hikes on the way
Joachim Nagel, a policymaker at the European Central Bank (ECB), reportedly said ECB’s current interest rates are not that high. He argued that they are not high when compared to the rates of inflation in the Eurozone.
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Nagel’s comments reflect the ECB’s ongoing efforts to balance its monetary policies and maintain a stable economy amid the ongoing challenges posed by inflationary pressures in the region. While the US achieved 6% inflation in February, it is at 8.5% in Euro Area.
“Wage developments are likely to prolong the prevailing period of high inflation rates. It will be necessary to raise policy rates to sufficiently restrictive levels in order to bring inflation back down to 2% in a timely manner,” Nagel explained.
All of this is logical as the Fed increased interest rates all the way to 5% despite already falling inflation levels. However, the ECB was slow to act, currently having the interest rates at 3.5%. The ECB will likely lift interest rates even more to follow in Fed’s footsteps.
What’s next for EUR/USD?
The currency pair EUR/USD started the week with minor gains near 1.0770, as market participants exercised caution while monitoring banking sector developments.
Despite the pair’s erratic performance, the broad risk appetite trends lacked a clear direction. However, the single currency received support from better-than-expected results (the best since February of 2022) from Germany’s Business Climate, which tracked an improvement in March.
Board members of the ECB, including Simkus and De Cos, commented on bank liquidity, capitalization, and tighter financial conditions impacting the economic activity and inflation outlook. Later in the day, Elderson and Schnabel are also scheduled to speak.
Technically speaking, EUR/USD managed to move upward since October, creating a half-year-long uptrend. Recently, it bounced from a 200-day moving average, which could kickstart another bullish move.
EUR/USD daily chart, source: tradingview.com
As the Eurodollar makes higher highs and higher lows regularly, it may reach the resistance of 1.1000 in the upcoming weeks, with a possible breakout upward. However, if EUR/USD manages to break the trend line, the currency pair could even reach parity again.