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The consensus is that the ECB will lay the groundwork for a rate hike in July without any major changes in policy this time around. What does it mean for a heard-hit EUR/USD?

Inflation over growth

In the last meeting's minutes, the ECB agreed that the criteria for the lift-off of rates had been met. That reinforced an interpretation that the central bank is focusing on addressing the growing problem of inflation, and less concerned about the potential impact that tightening might have on the economy. Last month's inflation came in at a multi-year high.

To complicate matters, the meeting is happening before several key macro data points from March. That's important, because they will have the impact of the Russian invasion of Ukraine, which isn't reflected in the current data set. It's one of the arguments brought up for why the ECB will hold off on a policy change until the next meeting. But, it's also pretty much understood that the impact from the war and sanctions would only exacerbate the existing problems of inflation and growth. Hence, the consensus that comments from Lagarde are likely to affirm the idea that tightening is coming.

The question is when?

The ECB is in the process of winding down its "normal" asset purchase program (APP), in its own version of a taper. Currently, it's buying €40B a month, and is "tapering" at €10B a month. Without changes, that means the program would complete in June, and the rate hike could be in July. The euro has been falling with this as the default scenario, and could continue to do so if this is confirmed at the meeting.

The ECB could opt to end the program earlier, either by increasing the "taper", or simply announcing that it is over. That would likely be a shock for the market if it happened at this meeting, but if the ECB via its statement and reinforced by Christe Lagarde at her press conference demonstrated sufficient worry about inflation, investors might start betting on an early end to the APP at the next meeting. That could give the Euro a boost.

Can the EUR/USD reversal be sustained?

The euro has found a bottom at $1.0810, but missed printing a new low below the March 6 support at $1.0805. This reduces the chances of a bullish reversal, however, a short-term bounce towards the 50-SMA at $1.11 can be expected. $1.09 and $1.10 are interim resistances.

Notably, the pair is still in a bear market, with an upward rejection increasing the probability of sliding back to $1.08 and even $1.063. The $1.07 support could offer a short-term relief if we descend.

Source: Spreadex trading platform

Key takeaways

The European Central Bank agrees that the criteria for lifting off interest rates has been met and will likely affirm at the next meeting that tightening is coming. Inflation and growth will probably exacerbate from the impact of the war, and policymakers understand that.

At this pace, the central bank is gradually winding down its asset purchase program to a June end, but the market might be betting on an early end to APP at the next meeting should it feel the urgency from rising inflation. This could cause the euro to find a bottom at 1.08.

If, however, the ECB completely disregards key March macros which aren’t reflected in the current data set, the euro could tumble, breaking down from 1.08, putting 1.05 in the crosshairs.