The ECB Surprises With 50-Bps Hike. The Dollar Braces for Fed Move

EUR/USD Caught in a Range as the Markets Await the FOMC Rate Decision.

Last week the European Central Bank decided to hike the interest rate for the first time in 11 years but the move was bolder than anticipated. The ECB added 50 basis points to the rate, double the consensus 25 basis points (actual 0.50%; previous 0.00%).

The bank and its leaders did not give any hints about the pace of future hikes but they will have to find the right balance between toning down inflation and avoiding a recession. Adding too much to the rate will make credit more expensive and will limit the amount of money in circulation, effectively lowering inflation. However, this also increases the risk of recession.

On the other side of the pond, the US Dollar eagerly awaits the FOMC Statement and the rate decision. A 75-bps hike is largely priced in but surprises can send the greenback soaring or crashing.

Key Data for the Week Ahead

The first notable release of the week is the CB Consumer Confidence scheduled for Tuesday at 2:00 pm GMT. The importance of this survey comes from its large sample size of about 3,000 households. Also, consumer confidence is a good indicator of consumer spending, which accounts for the majority of economic activity.

Wednesday at 6:00 pm GMT the FOMC Statement comes out, containing the outcome of the rate vote, details about the reasons that influenced the decision but also potential clues about future rate hikes. Half an hour later, Fed Chairman Jerome Powell will hold the usual press conference discussing the rate. He will read a prepared statement and then will answer journalists’ questions; this second part of the conference is usually the time when volatility increases the most.

Friday we take a look at both European and U.S. inflation with the release of the Eurozone CPI at 9:00 am GMT followed by the U.S. Core PCE Price Index at 12:30 pm GMT. Inflation is always a matter of high importance but more so now as both the ECB and Fed are struggling to contain it. Both indicators are expected to show higher readings.

Technical Outlook – EUR/USD

The pair is currently trading at 1.0215 and it is stuck in a range, seemingly waiting for the Fed rate decision. Going forward, the technical side will likely be overshadowed by the fundamentals, namely the “rate battle” between the ECB and the Fed.

Strictly from a technical standpoint, the RSI is coming out of oversold and the pair has traveled a long way down, so a stronger rally is possible. The MACD has just crossed upwards, showing increased momentum, which supports the idea that we may see more upside action.

If the bullish momentum continues, the next destination is the resistance at 1.0350, followed by the 50-day MA (blue line on the chart). To the south, the first point of interest is the support at 0.9952.