27.03.2023 07:31 PM
Christine Lagarde approved more rate hikes

The three meetings of the top regulators were held, but nothing was clarified. The market still does not know how long the cycles of tightening monetary policy in the United States, the European Union, and the United Kingdom will persist. All three central banks have emphasized time and time again that high prices are their primary concern and that all other problems are secondary. The GDP growth rates in the US and the UK or the EU are completely at odds with one another, therefore the market does not fully trust this assertion. For instance, the US GDP for the fourth quarter will be announced this week and will show growth of roughly 2.9% q/q. A value of more than 0% is unlikely to be reported in the same quarter's British GDP, which will be revealed the following day. Naturally, central banks are equally concerned with economic growth and are aware that a tighter monetary policy will result in a negative value for it. Then, within months if not years, we will need to restart economic stimulus.

Despite all the issues with the bank Credit Suisse, Christine Lagarde said in a speech on Friday that the banking industry in the European Union is stable. She noted that all Eurozone banks were required to scrupulously abide by the regulations to prevent scenarios from arising that would jeopardize the financial stability of the entire bloc. Lagarde added that there is no compromise between price and financial stability, and the regulator is equipped with the means to guarantee both. The ECB President also reaffirmed that while bringing inflation back to 2% is the primary objective, future rate hikes will be determined by the strength of the economy. Although rates have already raised by 350 basis points since July of last year, the ECB as a whole does not give up on the need to continue tightening policy.

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Based on this, the market can conclude that since inflation is still excessively high, interest rates in the European Union will continue to rise for a very long time. Although ECB members have claimed that the risks are low, I believe that in practice the rate hike may be less significant because there is still a significant chance that the Eurozone will experience a recession. At the moment, they are insignificant. The risks will rise if monetary policy tightens even further.

As I mentioned earlier, the market might now increase demand for the euro currency on the assumption that the ECB will raise interest rates more aggressively than the Fed. The Bank of England can be anticipated to do something similar by the market. Inflation is declining rapidly in the US, thus this cycle can be finished with just a few rate increases. If this factor truly has the capacity, both pairs' development of an upward trend section has already started.

I draw the conclusion that the downward trend section's development is finished based on the analysis. However, the wave analysis for the European is confused right now, making it challenging to determine where the pair is concerning the trend. Even after one wave up, which may be a complicated wave b, a new three-wave pattern of waves down can start to form. Therefore, based on the MACD reversals "up," I suggest cautious purchases with targets close to the 10th figure.

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The wave pattern of the pound/dollar pair presumptively represents the end of a segment of a downward trend (solely due to the correlation of the euro and the pound). According to the "up" reversals of the MACD indicator, it is possible to take into account purchases with targets higher than the 25-figure range at this moment. The possibility of developing a downward wave e, the targets of which are situated 500–600 points below the current price, is something I do not entirely rule out, though.

Chin Zhao,
Analytical expert of InstaForex
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