The euro continues its rally against the US dollar as the European Central Bank (ECB) still does not know when interest rates will peak and when it will end its aggressive policy, which was widely anticipated for the second half of the year. Yesterday, President Christine Lagarde said she was unable to declare the end of the historic tightening cycle any time soon.
The regulator made it clear that it would stay hawkish in the coming months. Lagarde also reiterated that July will mark the ninth consecutive increase in borrowing costs, which is directly related to the fight against inflation. "It is unlikely that in the near future, the central bank will be able to state with full confidence that the peak rates have been reached," Lagarde said on Tuesday, opening the ECB's annual meeting. "Barring a material change to the outlook, we will continue to increase rates in July."
The recent stages of rate hikes by the ECB are closely followed by investors as overall inflation is declining while underlying inflation is firm. Most economists believe that after the next policy change, officials will pause tightening at 3.75%. At the same time, markets estimate the peak to be around 4% by the end of this year. Now more than ever, the regulator would like to be wrong in its inflation forecasts. According to Lagarde, the ECB has plenty of options and will continue to use them if needed.
Economists and policymakers are also questioning how seriously rate hikes may impact the economy in the future. "How strong transmission turns out to be in practice will determine the effect of a given rate hike on inflation, and this will be reflected in the expected policy path," said Lagarde.
The latest data show that the economic backdrop in the eurozone continues to deteriorate. Figures from last week indicated that activity in the eurozone was low in June. On Monday, figures unexpectedly revealed a decline in Germany's business outlook.
"So, faced with a more persistent inflation process, we need a more persistent policy – one that not only produces sufficient tightening today but also maintains restrictive conditions until we can be confident that this second phase of the inflation process has been resolved," said Lagarde.
As a reminder, some European officials are willing to consider the possibility of selling securities from the ECB's portfolio in addition to the steps taken after the recent rate hike by the regulator. At the same time, there are also those who prefer to maintain a gradual reduction in the ECB's bond holdings, accumulated during the pandemic.
Technically, EUR/USD will remain bullish if it consolidates above 1.0980. In such a case, quotes may head toward 1.1010. The pair may even approach 1.1060 if macro releases in the eurozone come upbeat. Alternatively, the price may go down with activity increasing at around 1.0930. If there is no one there, it would be wise to wait for quotes to get to a low of 1.0890 or open long positions at 1.0840.
As for GBP/USD, demand remains strong despite a small correction. The pair is likely to show growth in case of a breakout through 1.2760, with targets at 1.2820 and 1.2880. Should the pair go down, the bears would attempt to gain control of 1.2690. If they succeed, a breakout through the range will trigger a fall in GBP/USD to a low of 1.2630, with the target at 1.2570.