The euro gained value, supported by weak ISM data from the US and ECB President Christine Lagarde's speech. Last week, there were rumors that the European Central Bank might follow the Federal Reserve and take a pause in its interest rate hike cycle, especially after inflation across the euro region eased. However, Christine Lagarde said yesterday that inflation pressures remained powerful and borrowing costs would be raised further to tackle them. This reinforced expectations of another interest rate hike at the meeting to be held next week and also backed the euro up.
With the full effects of the ECB's already historic monetary-tightening campaign still materializing, there is no clear evidence that underlying inflation has peaked, Lagarde noted. According to her, food price inflation remains elevated. "Price pressure remains strong. Our future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to our 2% medium-term target and will be kept at those levels as necessary," Lagarde told European Union lawmakers in Brussels.
As mentioned above, core inflation has slowed more than expected, but Lagarde's statements largely repeat phrases that many ECB officials have recently used following the May meeting. Despite a second slowdown in the core indicator, which is currently the focus of policymakers, most investors and analysts predict at least one more rate increase at the ECB meeting on June 15.
Governor of the Central Bank of Ireland Gabriel Makhlouf has recently stated that the ECB is likely to raise the rate at both the June and July meetings. As a result, the deposit rate is expected to reach 3.75% from the current 3.25%, which meets the consensus forecast of ECB economists. Italy's central bank chief Ignazio Visco believes that a rate hike in June may be the last in the current policy tightening cycle.
According to Bundesbank President Joachim Nagel, the European Central Bank still needs more interest rate increases. "From today's perspective, several more rate hikes are still necessary," Nagel said in a speech. "For me, it is not certain that we will reach the interest rate peak in the summer."
Considering that financial stability in the euro area remains reliable, with banks easily enduring a period of high-interest rates, the risks of slowing economic growth will also put some pressure on policymakers, forcing them to pause further increases as quickly as possible.
As for the EUR/USD technical analysis, to retain control of the market, buyers need to protect 1.0715 and push the price up to the level of 1.0750. In this case, the way to 1.0800 will open. Then the price may climb to 1.0835, but this scenario is possible only amid upbeat statistics from the euro area. In case of a decline, buyers are likely to regain control only at around 1.0715. Alternatively, long positions can be considered at the level of 1.0660, or after the euro hits a new low, falling below 1.0690.
Speaking of the GBP/USD pair, demand for the British pound persists. Further gains are possible after bulls take control of 1.2460. Its breakout will lead to a further recovery to 1.2485. In this case, the market may see a sharper rise to the area of 1.2515. In the event of a downward movement, bears will try to drag the price down to 1.2430 and break below it. If they succeed, the British pound dip to the low of 1.2400 and probably 1.2370.