- EUR/USD extends the upside and clinches new May highs.
- ECB’s Lagarde suggested July as a likely time to start raising rates.
- Germany Business Climate surprised to the upside in May.
Bulls regain the upper hand around the European currency and lifts EUR/USD to fresh monthly peaks in the 1.0680/85 band on Monday.
EUR/USD boosted by data, Lagarde
The recovery in EUR/USD gathered extra pace and retested the 1.0680 region following hawkish comments from Chairwoman Lagarde as well as a positive surprise in the German calendar.
Indeed, Germany’s Business Climate improved to 93 for the current month (from 91.9), while President Lagarde hinted at a probable rate hike by the ECB in July. She also suggested that rates could be in the positive territory at the end of Q3 and noted that disinflationary dynamics that prevailed during last decade are unlikely to be seen again.
The renewed upside bias in the euro was also supported by the uptick in the German 10y Bund yields, which manage to reverse three consecutive daily pullbacks so far on Monday.
Later in the NA session, the Chicago Fed National Activity Index will be the sole release in the calendar seconded by the speech by Fed’s Bostic.
What to look for around EUR
The ongoing recovery in EUR/USD now targets the key barrier at the 1.0700 yardstick.
Despite the pair’s current upside impulse, the broader outlook for the single currency remains in the negative territory for the time being. As usual, price action in spot should reflect dollar dynamics, geopolitical concerns and the Fed-ECB divergence.
Occasional pockets of strength in the single currency, however, should appear reinforced by speculation the ECB could raise rates at some point in the summer, while higher German yields, elevated inflation and a decent pace of the economic recovery in the region are also supportive of an improvement in the mood around the euro.
Key events in the euro area this week: Eurogroup Meeting, Germany IFO Business Climate (Monday) – Flash EMU, Germany PMIs, ECB Lagarde (Tuesday) – Germany Final Q1 GDP, GfK Consumer Confidence, ECB Lagarde (Wednesday).
Eminent issues on the back boiler: Speculation of the start of the hiking cycle by the ECB as soon as this summer. Asymmetric economic recovery post-pandemic in the euro area. Impact of the war in Ukraine on the region’s growth prospects.
EUR/USD levels to watch
So far, spot is up 1.14% at 1.0681 and faces the next hurdle at 1.0789 (55-day SMA) followed by 1.0936 (weekly high April 21) and finally 1.1000 (psychological level). On the downside, a breach of 1.0348 (2022 low May 13) would target 1.0340 (2017 low January 3 2017) en route to 1.0300 (round level).
