EUR/USD jumps as Lagarde hints at rate hikes

The FX trading week started with the common currency, the euro, rallying. Comments from the European Central Bank (ECB) head, Christine Lagarde, that the bank plans to exit negative territory this year have sent the euro higher.

Euro rallies across the board, but the advance is most visible against the US dollar. The American currency gained against the euro in the past twelve months, as the exchange rate dropped from 1.22 last May to 1.04 a couple of weeks ago.

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But is the ECB message a game-changer? Has the EUR/USD bottomed, or should traders fade this rally?

Falling wedge pattern hints at more upside

The strong US dollar made many victims on the FX dashboard, especially since the Federal Reserve turned uber hawkish. The Fed raised the rates aggressively and plans to continue tightening financial conditions.

Yet, it could be very well that everything is priced in already. As the daily EUR/USD chart shows, the currency pair formed a falling wedge pattern.

Conservative traders should wait for the market to break above the upper trendline before going long, and if the EUR/USD closes at the current levels, it confirms the breakout. After a falling wedge, the market typically reverses at least half of the distance it traveled during the wedge’s formation.

In other words, the EUR/USD has no resistance until 1.12.

Lagarde says the ECB plans to exit negative rates territory

The ECB has kept the deposit facility rate below zero for many years. It also ran quantitative easing programs designed to weather the European economies during the economic recessions.

But the ECB’s mandate involves price stability. With inflation running well about the ECB’s target, it is too dangerous to ignore it despite the war in Ukraine and the hurdles it poses to the European economies.

In today’s remarks, Christine Lagarde committed to a 25bp rate hike in July, followed by another similar hike in September. But perhaps more important is that she does not commit to anything beyond September.

All in all, the euro rallies on ECB’s message. Until September, traders have plenty of time to interpret the forward guidance the central bank will provide during the summer.