More rate hikes from the central banks?

As the European Central Bank looks set to raise interest rates again, why do central banks raise rates？

In an almost synchronised manner, central banks from all around the world are rushing to raise their key interest rates in a bid to tame high inflation, which, much to their dismay, continues to break monthly records.

Todays big market mover for EURUSD is the CPI estimate for the EU economies. The CPI y/y has been slipping lower for 3 months. Even though Spanish and French inflation ticked higher earlier this week (Spanish: 6.1% y/y from 5.9 and French: 7.2% y/y from 7.0%) analyst consensus puts the EU-wide number lower at 8.3% (8.6% prior).

The U.S. Federal Reserve has just implemented its smallest rise of its tightening cycle so far. The European Central Bank and the Bank of England raised rates on Thursday, but markets suspect a peak is nearing. As investors weigh signs of persistent inflation they sell bonds pushing the yield higher. This pushed DJ and NAS to key support levels from where the DJ reacted slightly higher but the more yield-sensitive NAS remained weak. The two main risk events for the day are the EU CPI and the ISM Services PMI release from the US.

The European Central Bank (ECB) has bumped rates three times in four months, putting an abrupt end to a long chapter of negative rates dating back to the worst years of the EU's sovereign debt crisis

Its counterparts in the UK, Sweden, Norway, Canada, South Korea and Australia have all taken similar steps in reaction to daunting inflation readings.

The Federal Reserve of the United States has delivered three consecutive jumbo hikes of 0.75 basis points, with similar moves coming down the pipeline.

EURUSD Daily

The most traded currency pairs in the world are called “the Majors” and the EURUSD leads this group as the most traded pair in the world. This pair represents the world two largest economies and has faced most volatility since the inception of the euro in 1999. EURUSD broke out of the bearish trend channel and rallied to the 1.0700 region. If the EU CPI surprises to the upside we should see continued bullishness in EURUSD but if the number comes in below expectations, yesterdays rally might fade.

Lets observe what the reaction to the CPI is. As always, trade the reaction to the news not your expectations on what the news should mean to EUR. I refrain from directional analysis now as there are two unknowns, the news itself and the price action that follows. Key price levels in EURUSD are 1.0536, 1.0565 and 1.0704.

EURUSD WeeklyEURUSD Weekly

Intraday bias in EUR/USD is turned neutral again as it retreated sharply after hitting 1.0690, and failed to sustain above 4 hour 55 EMA. Fall from 1.1032 could still extend lower. But strong support is expected from 38.2% retracement of 0.9534 to 1.1032 at 1.0463 to bring rebound. Break of 1.0690 will turn bias back to the upside for 1.0803 resistance first. However, sustained break of 1.0463 will carry larger bearish implication and bring deeper decline.

USDJPY trends higher above 135.25

USDJPY is bullish above 135.25. Below the level, the market could retrace back to 134.80. If the 135.25 level‘s not violated then it’s probable the market will trade to 137.50 or so.

USOIL bulls bought the dip

USOIL is bullish above 76.18. The market retraced (as expected) lower and attracted buyers near the SMA(50) and the channel low. This provided us with a good long entry opportunity. The quick move higher following the dip supports the idea that the market is likely to break the resistance and move higher. This is the more likely scenario as long as yesterday‘s low isn’t violated decisively. If however, the 76.18 level breaks then we might see USOIL trading down to 75.20 or so.