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Euro Rallies as Bundesbank Claims ECB Did Not Rule Out a Rate Increase

Euro Rallies as Bundesbank Claims ECB Did Not Rule Out a Rate Increase

Benjamin Spier, Technical Strategist

THE TAKEAWAY: Bundesbank says guidance doesn’t rule out a rate increase -> Draghi seemed to say otherwise in August press conference -> Euro rallies on statement

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The German Bundesbank said in a monthly report today that ECB guidance doesn’t rule out a rate increase. Those comments were released despite that European Central Bank President Draghi said at the beginning of the month, following a decision to keep the target interest rate unchanged at 0.5%, that rates will remain at current or lower levels for an extended period of time.

The German Central Bank continued to say that a rate hike would be possible if inflation pressure emerges, and that the ECB’s forward guidance did not show a change in policy stance. The Bundesbank further said that German economic growth returned to its potential in the second quarter.

The Bundesbank comments about a rate hike seemingly directly contradicted Draghi’s statement mentioned above, but that did not stop the Euro from rising 40 pips against the US Dollar. The Bundesbank is known to be hawkish when compared to other central banks that make up the Euro-zone’s ECB. Furthermore, inflation was last reported at 1.6% in June, well below the ECB’s 2% inflation target and above the ECB’s forecast for 1.4% in 2013.

Therefore, it is unclear why exactly the Euro rose on the tough to believe hawkish comments, possibly because of a change of perception of the Bundebsank’s stance, and not a new perspective on general ECB policy. A 6-month high at 1.3416 may provide resistance for EUR/USD, and support may be provided by a broken resistance line around 1.3180.

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EURUSD Daily: August 19, 2013

Euro_Rallies_as_Bundesbank_Claims_ECB_Did_Not_Rule_Out_a_Rate_Increase_body_eurusd_daily_chart.png, Euro Rallies as Bundesbank Claims ECB Did Not Rule Out a Rate Increase

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to instructor@dailyfx.com .

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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