Euro slides The remedy can be worse than the disease itself. It's strange that it was not the members of the ECB Governing Council but the Italian government who started talking about it. Italian Prime Minister Giorgia Meloni, following her officials, criticized the "hawkish" rhetoric of Christine Lagarde and her colleagues. According to her, continuous interest rate hikes can cause more harm to the economy than reduce inflation. This makes it a remedy that is worse than the disease itself. After these words, the bulls on EUR/USD were forced to retreat.
The aggressive rhetoric of the Italian official has the right to exist. Inflation in Italy, the third-largest economy in the Eurozone, slowed down from 8% to 6.7% in June, the lowest reading in the past 14 months. On paper, this could calm the "hawks" of the ECB. However, prices are still far from the target of 2%, so the tightening of monetary policy is likely to continue.
Italian inflation dynamics
The question is, how high will the deposit rate rise? ECB Vice President Luis de Guindos called July a resolved option, while September remains live. He suggests that whether the central bank takes another step towards monetary restriction in the autumn will depend on incoming data. The ECB will likely follow the example of the Fed and take a pause to then continue what has been started.
Interestingly, Bank of America believes that the Federal Reserve may raise the cost of borrowing in a pattern of every other meeting. That is, in July, it will raise the rate to 5.5%, take a break in September, and then raise it again to 5.75% in October. The anticipation of death is worse than death itself, so such a strategy can keep the U.S. dollar afloat for a long period of time. It's too early to sell the American currency. And the markets will gradually be convinced of this.
If in March–April, EUR/USD rose due to concerns about a recession in the U.S. economy and the associated idea of a "dovish" pivot, now there is no talk of that. Positive statistics on new home sales, orders for durable goods, and consumer activity are convincing evidence that a decline is still far away. So why get rid of the U.S. dollar?
I have repeatedly emphasized in previous materials that regional currency won't go far with just "hawkish" rhetoric from the ECB. The euro rose due to public speeches by officials and expectations of accelerating German and European inflation. However, when it became clear that there are serious opponents of tightening monetary policy, one of the advantages of EUR/USD played out. Soon, the other two advantages may also play out.
Technically, on the daily chart, the main currency pair is forming reversal patterns such as 1-2-3 and Head and Shoulders. To build on the shorts formed in the convergence area of 1.0965–1.0975 on EUR/USD, a successful test of the pivot level and the 23.6% Fibonacci level of the last upward wave is required, located near 1.092. The initial targets for sales are 1.0865 and 1.0825.