EUR/USD: Strengthens as Lagarde Urges ECB to Maintain Tight Policy Stance

Highlights

• Lagarde highlights persistent Euro Zone inflation, calls for continued rate hikes.
• Rapid wage growth and low productivity offsetting inflationary pressures.
• Labor market resilience and hoarding impact productivity, contribute to rising wages.

Overview

The Euro strengthened against the U.S. Dollar on Tuesday following remarks by European Central Bank (ECB) President Christine Lagarde, who highlighted the persistent nature of Euro Zone inflation. Lagarde emphasized the need for the central bank to maintain a tight policy stance and avoid prematurely ending rate hikes. The ECB has steadily raised rates at each meeting over the past year, reaching a deposit rate of 3.5%, with further tightening expected as early as July to combat inflationary pressures.

Lagarde: Uncertainty Surrounding Interest Rates

Lagarde acknowledged that the central bank may not be able to confidently declare the peak of interest rates in the near future. The uncertainty arises due to the impact of rapid wage growth; however, this is being offset by lower-than-expected productivity growth. The labor market’s resilience and the composition of employment growth contribute to this dynamic, potentially prolonging inflationary pressures.

Euro Zone Firms Hold Workers, Drive Wage Growth

Despite recent economic challenges, firms in the Euro Zone have unexpectedly held onto workers, leading to wage growth. This phenomenon is partially driven by labor shortages, which have resulted in increased labor hoarding by companies. Lagarde noted that this trend hampers productivity growth and may persist for some time.

Low Productivity Sectors Drive Wage Growth

Additionally, employment growth has predominantly occurred in sectors with historically low productivity growth, exacerbating the situation. Lagarde warned that rising nominal wages, coupled with subdued productivity growth, will continue to impact unit labor costs.

ECB Must Commit to High Interest Rates

Considering these developments, the ECB must commit to maintaining high interest rates for an extended period. This approach aims to avoid creating expectations of a swift policy reversal and allow the full impact of past actions to materialize.

ECB to Focus on Managing Inflation

In conclusion, Lagarde’s remarks underscore the ECB’s focus on managing inflationary pressures in the Euro Zone. The central bank stands ready to maintain a tight policy stance and continue rate hikes in order to address the persistent nature of inflation.he outlook for the Euro will depend on the ECB’s commitment to this approach and its ability to balance inflation control with economic growth.

Technical Analysis

The EUR/USD is currently displaying a shift toward bullish sentiment as the price trades on the strong side of the 50-4H moving average. This indicates potential upward momentum. The price is also above the 200-4H moving average, further supporting a bullish bias. The 14-4H RSI reading of 54.98 suggests a balanced market sentiment without extreme overbought or oversold conditions.

The main support area at 1.0849-1.0808 provides a level of downside protection, while the main resistance area at 1.1006-1.1074 presents potential upside barriers. Overall, the EUR/USD market is currently tilted towards a bullish outlook, but traders should remain vigilant for any significant changes in market dynamics.