21.03.2023 11:45 AM
Euro rises as ECB chief Christine Lagarde says they are not done raising rates

EUR/USD rose on Monday as statements of ECB President Christine Lagarde indicated that the central bank does not plan on abandoning its aggressive rate hike even amid the current situation in the banking sector.

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Clearly, the central bank members do not see any contradiction between their mission to target inflation and their duty to prevent threats to the financial system. Lagarde even said that price stability is linked to financial stability, so there can be no compromise. "Financial stability, to the extent that it affects the economic situation, affects our forecasts in the same way. But these are two different areas that are being dealt with by different instruments," she noted.

The ECB raised interest rates by half a percentage point last Thursday, but did not give any signals about its further steps. Now, traders are trying to catch some hints from Lagarde's speech yesterday.

The fact that the ECB chief has split financial, price stability and economic targets into opposite sides of the barricades makes investors feel more relaxed, as increased uncertainty after the collapse of Credit Suisse has led to turmoil in the European bond market.

In her opening statement to the European Parliament, Lagarde stuck strictly to what officials said last week, that is, the central bank "will respond as necessary to preserve price and financial stability." She also reiterated Sunday's statement about the Swiss National Bank's correct decision on Credit Suisse.

"We are using the interest rates we have and that will always be the case. We have enough room to move at the pace we are going," Lagarde said. "As far as financial stability is concerned, we have all the tools we need, and those tools will be used if necessary," she added.

While these statements had a reassuring effect on investors, Lagarde acknowledged that the banking turmoil could eventually force officials to change their minds. "Tensions over financial stability could affect demand and actually do some of the work that high interest rates would otherwise do," she said. "This impact is unclear at the moment, but it needs to be taken into account, especially when we conduct our next assessment of the economy and decide on the next step of monetary policy changes."

At the time of writing, EUR/USD has a very good chance of getting back to the March highs, but for this to happen, buyers need to keep the quote above 1.0690. That will allow the pair to go beyond 1.0760, heading towards 1.0800 and 1.0835. In the event that sellers manage to take control of 1.0690, the pair will fall to 1.0650 and 1.0615.

In GBP/USD, buyers are ready to keep storming the monthly highs, but the quote has to stay above 1.2220 and breakthrough 1.2300 in order to maintain the momentum. Only a breakdown will push the pair to 1.2340 and 1.2390. Should sellers take control of 1.2220, a decline will occur, which will bring the pair to 1.2170 and 1.2115.

Jakub Novak,
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