Euro Edges Higher As Markets Eye ECB

06/08/2022

1 minute read

2022.06.08 18:01

The euro is in positive territory on Wednesday. In the European session, EUR/USD is trading at 1.0727, up 0.20% on the day.

ECB to terminate QE, start rate-hike cycle

It has been a calm week for the euro thus far, but that could change on Thursday, as the ECB holds a key policy meeting. It is widely expected that the Lagarde & Co. will pivot to a tightening bias, which in itself is a dramatic development as the ECB has maintained an accommodative monetary stance for years.

The ECB has been signaling a more hawkish stance for months as policymakers have scrambled to battle surging inflation in the eurozone, which has hit 8.1% in May. At tomorrow’s meeting, ECB President Lagarde is expected to take the formal step of announcing that the QE program will wind up early in Q3, with the interest rate liftoff to continue in July. The markets will be looking for guidance with regard to the size of upcoming rate hikes. Any hints of a supersize 50bp increase would be bullish for the euro. The ECB will also release updated inflation and GDP forecasts, with inflation likely to be revised upwards and GDP downwards. This would indicate that the risk for eurozone growth remains tilted to the downside, which means the euro will have a tough time gaining on the dollar in short to medium term.

The eurozone released employment and GDP data for Q1 earlier in the day, and the numbers were nothing to write home about. Employment and GDP both rose by 0.6%. Consumers are holding their purse strings tight, as household final consumption expenditure in Q1 came in at -0.7%, weaker than the -0.3% reading in Q4 2021. Weak consumer demand hurt GDP, and with the ECB poised to hike rates, consumer spending could continue to decline, which would be bad news for the fragile eurozone economy.

EUR/USD Technical