25.07.202220:18 Forex Analysis & Reviews: ECB's hawkish rhetoric prevents EURUSD from sinking

While disappointing statistics on the eurozone are increasingly hinting at an approaching recession, ECB officials are using verbal interventions to do everything possible so that the bulls on EURUSD cling to their previously won positions with their teeth. The main currency pair managed to stay above 1.02 and is considering developing a counterattack against the background of the expected acceleration of European inflation to a new historical high.

According to the IFO Institute, the German economy is on the verge of recession. It is under pressure from gas shortages and high energy prices. At the same time, companies predict a further deterioration in business activity in the near future. Indices of expectations and current conditions fell to their lowest levels since the start of the pandemic.

Dynamics of German business expectations and current conditions

Coupled with the decline in the composite purchasing managers' index of Germany to the lowest level in the last 25 months, this indicates serious problems in the German economy. It will most likely drag down the entire currency bloc, whose GDP is expected to slow down in the second quarter from 0.6% to 0.1%. The option of the indicator sagging into the red zone is not excluded. At the same time, European consumer prices in July risk accelerating from 8.6% to 8.7%. The highest inflation and sluggish economic growth in the history of the eurozone. The region is in a state of stagflation and is about to descend into recession. How can the euro rise?

The fact is that in other parts of the world, the situation looks no better, while the hawkish rhetoric of ECB envoys supports the bulls on EURUSD. In particular, the head of the Bank of Austria, Robert Holzmann, said that a recession should be paid for the victory over inflation. The Fed-style rhetoric suggests that the European Central Bank is ready to raise rates more than expected. The head of the Bank of Latvia, Martins Kazaks, hinted that the increase in the deposit rate by 50 bps in July is not the only advance payment. In September, history may repeat itself. In his opinion, the markets expecting an increase in borrowing costs by 150 bps over the next 12 months are generally right. Some banks, by the way, predict an even higher ECB rate.

ECB deposit rate forecasts

In my opinion, the hawkish rhetoric of the officials of the Governing Council is not accidental. ECB President Christine Lagarde named three reasons for high inflation: high energy prices, a weak euro, and strong domestic demand. The ECB is able to influence the last two. Let's see if it will be possible to stabilize the euro with the help of verbal interventions.

Technically, on the EURUSD daily chart, the bulls are trying to realize a combination of Three Indians and Splash and shelf patterns. There is a high probability of a false breakout of the upper limit of the consolidation range or the "shelf" of 1.012–1.027. If it happens, the return of the pair's quotes to a fair value of 1.018 is a reason to sell the euro.