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EUR/USD Vulnerable: Policy Divergence and Lagarde’s Unusual Request

Euro Fundamental Weekly Forecast: Bearish

  • Lagarde requests that dissenting members delay policy criticism after ECB meetings
  • Extreme policy divergence creates EUR/USD ceiling, 2020 lows clearly in sight

Friday brought the week to a close with a slew of PMI data which revealed further euro/US contrasts outside of the obvious monetary policy divergence. In the Eurozone, the rebounding services sector made up for a “near stalling of manufacturing output”. Whereas in the US, it was the services sector that drastically undershot estimates while manufacturing provided a positive surprise.

EUR/USD Vulnerable: Policy Divergence and Lagarde’s Unusual Request

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Lagarde Encourages Dissenting Council Members to Delay Policy Comments

In a rather unusual request to ECB governing council members, ECB President Christine Lagarde has requested that all dissenting views on monetary policy decisions be withheld until the Monday after the ECB monetary policy meetings and press conference.

Leaks from unnamed “sources” have popped up during previous ECB monetary policy statements and the press conference that follows. Ironically, the Reuters report publishing this information refers to the very “sources” that Lagarde is hoping to persuade. Lagarde has also requested members not to leak details of the internal discussion to the press.

ECB hawks, such as Germany’s Joachim Nagel, Belgium’s Pierre Wunsch and others, have grown tired of the council’s deliberate and gradual approach to ending its accommodative policy before finally implementing the regions first rate hike since the pandemic.

Policy Divergence to Continue Throughout Q2

It remains a fairly realistic possibility that the Federal Open Market Committee (FOMC) decide to hike rates by 50 basis points in each of its next three monetary policy meetings, at least, that is what the markets are expecting.

Market Implied FED Interest Rate Hikes

EUR/USD Vulnerable: Policy Divergence and Lagarde’s Unusual Request

Source: TradingView, prepared by Richard Snow

On the contrary, markets are eying July (early Q3) for the ECB’s first rate hike and by that stage the Fed may have already raised the Fed funds rate by a further 1% from today’s 0.25% – 0.5% range. Widening interest rate differentials are likely to suppress the euro even further.

Market Implied ECB Interest Rate Hikes

EUR/USD Vulnerable: Policy Divergence and Lagarde’s Unusual Request

Source: TradingView, prepared by Richard Snow

With the weaker fundamentals in the euro zone, compared to the aggressive rate hiking trajectory of the Fed, further EUR/USD is likely in my view. The next level of support is 1.0635, the 2020 low which could come into play if the dollar continues its bullish trend.

Daily EUR/USD Chart

EUR/USD Vulnerable: Policy Divergence and Lagarde’s Unusual Request

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX