Lagarde's Comments Fail To Lift The Euro
InstaForex Group | May 25, 2022 04:23AM ET
The preliminary data on business activity in the eurozone came in much worse than expected. Thus, the manufacturing PMI declined to 54.4 from 55.5 against the forecast of 55.0. The business activity index in the services sector, which was expected to fall to 57.3 from 57.7, actually dropped to 56.3.
As a result, the composite PMI went down to 54.9 from 55.8, while analysts projected it to reach the level of 55.0. So, it is hardly surprising that after the release of the preliminary estimates, the euro began to depreciate.
However, after the start of the North American session, the pair returned to the levels where it was holding before the publication of the eurozone PMI data. The thing is that the same indicators in the US turned out to be way below the forecast.
For instance, business activity in the US services sector dropped to 53.5 from 55.6, while the forecast was 55.0. The manufacturing PMI decreased to 57.5 instead of falling to 58.8 from 59.2, as was projected earlier. The composite PMI went down to 53.6 from 56.0, contrary to the expectations of a decline to 55.5.
The ECB published a statement by Christine Lagarde about the future policy of the regulator. The head of the ECB made it clear that the central bank would raise the rate as soon as July this year. This comment should have supported the European currency. However, the euro was depreciating, although at a slow pace.
One could say that the market downplayed the words of the ECB President. But this was not the case. Market participants got it right. Christine Lagarde’s statement was full of uncertainty, which raised doubts that the ECB would actually do something.
She did not even specify what rate she was talking about. The head of the regulator never used such words as “funds rate,” but instead, she discussed the end of negative interest rates and neutral policy. Therefore, we can conclude that she talked about the deposit rate that currently stands at -0.5%.
Moreover, Christine Lagarde mentioned the changing conditions and the need to use a more flexible approach to monetary policy. Based on this, market participants concluded that even if the ECB initiates a rate hike, it will start with the deposit rate, and it may take too long to raise it at least to 0.0%. This is why the increase in the funds rate may still be far away.
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Today, the US dollar may get additional support from the data on durable goods orders. The indicator is expected to grow by 0.4%, a good result signaling a rise in consumer activity. So, the greenback will gradually gain ground.
The euro strengthened against the dollar by almost 400 points in a week and a half. This movement is seen as a correction within the medium-term downtrend.
The RSI is holding in the overbought zone on H4, which corresponds to a sharp rise in the euro over a short period of time. The RSI on D1 crossed the median line of 50 and moved upwards, a signal of an extended correction.
The MAs of the Alligator Indicator on H4 are heading upwards, thus confirming the continuing corrective movement. The Alligator Indicator in D1 signals that the downtrend is slowing.
h2 Outlook/h2Despite the overbought status of the euro, the correction is still relevant in the market. The area of 1.0770/1.0800 serves as resistance for the bulls. This is where traders may decrease the volume of long positions. If this scenario is true, the quote may return below the level of 1.0636.
Comprehensive indicator analysis generates a buy signal in the short-term and intraday time periods due to the ongoing correction. In the medium term, indicators confirm the sell signal, corresponding with the main trend.
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