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May 26, 2022

Why Euro Is The Biggest Winner This Week

Frank Cabibi

One of the forex market's worst performers this year now has the potential to become one of the best plays in 2022. On the day, euro is up and is performing stronger against the USD than any other currency as of now. EUR/USD is up 0.36% today.

Euro To "Positive Territory At The End Of The Third Quarter"

This week, ECB president Lagarde pointed towards a higher rate on the euro and an eventual positive yield by the third quarter of this year. If this were to happen, interest rates would have to be somewhere around a 50 bp hike by Q3. Although bank rates are still negative, we are seeing signs of a momentum shift with the stock market as well. If we start seeing risk-on sentiment on a global scale, the euro is likely to perform well on the upside.

euro
https://tradingeconomics.com/euro-area/interest-rate

A good thing about this recent statement is that investors may still be trying to price it in. The reason this could be very beneficial to investors is that bank rates in Europe have not been risen in over ten years. Policy makers might have realized that they have little choice in the matter as the rest of the world is moving towards tighter monetary policy in the future. Either way, it is a good sign for euro strength and has led to increased investor demand for the day.

Going Forward

It seems that, regardless of today's spike and the performance of last week, the euro still has room to run especially if global economies can start showing signs of growth again like the US's latest jobs report. Being out of negative territory like Lagarde said could either mean rates will hit 0% or somewhere above 0%. And it is still unclear as to whether the rate of change will be a more aggressive 50bp hike versus two hikes of 25bp. A more aggressive stance is better for the currency.

As long as the job market comes back in the Euro-area, these changes in monetary policy could end up being beneficial to the euro overall.

Euro Setups

EUR/USD

euro

This pair has a long way to go before it looks bullish on a technical scale. There is a clear level of resistance in the way at 1.07577 followed by a falling trend line on the 1D timeframe. So, there is still a chance that the pair turns back the other way, but price will likely test that level first.

EUR/JPY

EURJPY looks ready to break out of a tight wedge pattern on the 1D as price comes up nearly half a percent on the day. A hard rejection from the bottom of the wedge looks bullish on a technical scale. If price can break and close above the wedge, a test around the 138.200s looks possible.

EUR/CAD

EURCAD came up to resistance before retracing off that level today. The pair has been making bigger swings in the past couple months suggesting an increase in volatility. Compared to the loonie, the euro might struggle to find the advantage due to the lower inflation, unemployment, and higher GDP.

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