When Mario Draghi said 10 years ago that the ECB would do whatever was necessary to save the euro, he didn't know that, ironically, he would become the prime minister of a country that could kill the European currency. Italy's public debt exceeds 150% of GDP, with €200 billion to be repaid in 2022 and €305 billion in 2023. At the same time, the ECB's monetary tightening process, which starts in June, leads to an increase in borrowing costs and increases debt servicing costs. All this increases the risks of default and the collapse of the eurozone. Bulls on EURUSD have something to fear. No wonder they take a step back after one or two steps forward.

ECB President Christine Lagarde is well aware of the gravity of the current situation, so she promised the markets an anti-fragmentation program. It is aimed at narrowing the yield spreads of the same Italian bonds with German ones. An increase in the indicator indicates stress in the debt market, while its decrease indicates that the market has come into order. The problem is that the details of the program are unknown and investors doubt whether the ECB will be able to develop it by July.

Some points are leaked to the press. In particular, the European Central Bank does not want to increase liquidity, so it is planned to use funds raised from banks as resources for the implementation of the anti-fragmentation program. They will be obtained at auctions at a rate higher than the deposit rate. It should be noted that over 10 years, the ECB has accumulated excess reserves of €4.48 billion, which gives it room for maneuver.

Investors were looking forward to Lagarde's speech in Sintra, Portugal, with increased attention, drawing analogies to 2017, when Draghi launched an avalanche of EURUSD buying with a statement about the normalization of monetary policy. This time the euro bulls did not wait for a gift for themselves. Lagarde said that the ECB intends to start by raising the deposit rate by 25 bps, and then accelerate the process in September. In the future, the Central Bank plans to act gradually. Only a significant acceleration of inflation and inflationary expectations will force it to turn on its decisiveness.

Dynamics of Central Bank Rates

Not good news for EURUSD fans, because the Fed has already included this decisiveness. Currently, the derivatives market expects a 238 bps cumulative increase in the deposit rate by mid-2023 compared to 280 bps two weeks ago. As a result, borrowing costs may fall short of 2%, while the federal funds rate will exceed 3.5%.

In my opinion, investors expected more from Lagarde's speech. Her rhetoric turned out to be not hawkish enough, which launched the mechanism of selling the euro on facts.

Technically, a 1-2-3 reversal pattern was formed on the EURUSD hourly chart. The fall of the pair's quotes below the correction low in point 2 gave grounds for building up the previously formed shorts due to the inability of the bulls to take the euro beyond the upper limit of the fair value range of $1.05–1.057. The recommendation is to keep it.