2022/04/17 (026) Technical Analysis – DXY

EURUSD hovers at 23-Month Low
& USD Index around 100 – as excepted!
But don’t be fooled when it comes to rate hikes in the euro area…



At first, a late ECB review again for better self-understanding

As you know, I’ve been to Italy in the last few days – and haven’t formulated a new D2D edition for a week. So that the ECB meeting on Maundy Thursday should be briefly commented on for my readers. For those of my readers who celebrated Christian Good Friday and Easter, as well as Jews celebrating Passover, congratulations once again looking back.

Before I try to give you a review of the ECB meeting today, here and now.
The ECB has announced that it intends to end its asset purchases in the third quarter of this year 2022. So we can assume that rate hikes will only start after that. But that’s not what I’m assuming. Rather, I fear that it will take months longer. Which is one of the reasons why I formulate the longtrading capability in the USD Index. So that we (USD bulls) can at best record the statements made by ECB President Christine Lagarde last Thursday as a hinted hawkish statement. Which is understandably not good enough for the euro area economy. Because in view of the fact that in March prices were 2½% above the February levels and have risen by 7½% over the year, there is actually nothing standing in the way of another first interest rate hike!? Except maybe the fear of not sending the already relatively weak economic recovery in the euro area into a recession, precisely because of interest rate hikes?! And may be that`s why the ECB is acting dovishly consistently. The ECB done that before, and it’s actually not a bad strategy. Since it thus provides the least future planning security – even if it doesn’t help us consumers in the euro area. Because it only helps the euro banking system to adapt to new ECB conditions and harms the euro in nominal external value compared to the other currencies. Which, admittedly, also benefits our export-heavy economy in Germany. But what we all consumers, in the euro area, actually pay in the form of galloping inflation, in the truest sense of the word.
Don’t be fooled when it comes to interest rate increases in the euro area

I have not been able to cope with the dovish interest rate policy of the ECB for years.
Even if it is here in my home country, Germany, that we benefit the most economically. But please not again at the price that we Germans (in the Eurozone) are perceived as a problem because we are both monetary and fiscal hawks by nature. This is our nature – our monetary policy and fiscal policy DNA, since WWII. Even if such a restrictive policy cannot currently be organized with a democratic majority in the euro area.

However, for EUR exchange rates, it is not important what the current interest rate differential between the exchange rate pair is, but also the prospect of the interest rate differential in the medium term. In the longer term. And it’s not just that it doesn’t look good. On the contrary, the ECB will find it more than difficult to maintain an interest rate hike cycle due to the numerous national economic interests of the individual countries. That`s why the traditional dovish monetary policy, at least in my opinion, not only harms the nominal euro external value, but also us euro consumers. And that, because after so much and so long unconventional, ultra-expansive monetary policy and in the face of an inflation shock that is unprecedented, at least in terms of speed, the old confidence that the ECB will still act appropriately is no longer there to a sufficient extent.

If you like, the FED strengthens trust in your institution with its rate hikes. While the ECB, to put it diplomatically, is not yet strengthening it. Although a rate hike by the FED that is too strong and too rapid, with rate hikes of more than 25 basis points (at each upcoming regular meeting), is not likely to increase confidence in the FED either. Rather, it could also be perceived by experts as a belated admission of a hitherto flawed interest rate policy. But when do I write that, my imperfect financial market enthusiasts, Central bankers around the world are also imperfect – like us. But at least more competent than us. Which I assume, and I assume that the rate hike cycle will be organized in a balanced way – and not only in the case of the FED and/or the ECB. The dovish monetary policy of the ECB should therefore be seen as a higher risk that the ECB will not normalize its monetary policy as clearly as would be appropriate, or that normalization will take place so late that the inflation trend will then have become so sustainable that the ECB with her dovish measures she can no longer get a grip. And that`s why the EURUSD exchange rate has already fallen in the last few days, weeks and months – and is likely to continue to fall in the future.

I don’t want to badmouth the ECB, let alone the FED

Nevertheless, FX market traders do not seem to perceive the low EURUSD exchange rate as contradicting the money market. By the end of the year, however, this is already pricing in around 50 basis points of euro interest rate increases. And even more than 125 basis points by the end of 2023. The spread to the expected FED interest rate hike cycle seems to be widening in principle. That’s why I still formulate this pretty conservative long trading capability in the USD.

Euro Hovers at 23-Month Low

The euro depreciated to below the $1.08 level for the first time since May 2020 on uncertainty about the timing of interest rate hikes in the Euro Area. The ECB said that any adjustments to interest rates will take place some time after the end of the Governing Council’s net purchases under the APP and will be gradual and reinforced its expectation that net asset purchases under its asset purchase programme should be concluded in the third quarter. In Europe, investors are also concerned about the hit to economic growth from the war in Ukraine and surging commodity prices, as well as political uncertainty in France. President Emmanuel Macron clinch the top spot in the French presidential election but far-right leader Marine Le Pen’s close second-place finish sets up a competitive runoff election on April 24.

However, this should not have any direct impact on the fundamental bearish trend in the EURUSD exchange rate.