The euro is finding it difficult to gain bullish momentum amid data, despite statements from European Central Bank officials, revealing that consumers' inflation expectations fell to the lowest since 2016 in a gauge compiled by the European Commission. According to the release published in Brussels, price growth aren't becoming entrenched in the economy, which theoretically allows the central bank to take a necessary pause in September to assess the state of the economy, as rumors have been circulating recently.
The measure dropped to 6.1 in June, down from 12.1 the previous month. The index reflects the results of a household survey on expectations of inflation one year ahead.
As I mentioned earlier, this news will certainly give confidence to the ECB, which continues to actively raise interest rates to combat high underlying inflation. "We must ensure that inflation expectations remain anchored as the wage catch-up process plays out," said ECB President Christine Lagarde recently. "While we do not currently see a wage-price spiral or a de-anchoring of expectations, the longer inflation remains above target, the greater such risks become."
The survey results were obtained prior to data that may show an acceleration in the growth of the euro area's core consumer price index, which still significantly exceeds the ECB's 2% target. The latest figures for Germany indicated even stronger growth than economists' forecasts, while prices in Spain remained below 2%.
It is evident that the ECB is unlikely to deviate from its plans, but the initial signs of a real slowdown in inflationary pressures in different regions of the eurozone are good news. "Without for a moment being fatalistic, we should not underestimate the downside risks that we now confront" said Paschal Donohue, President of the Eurogroup. "Our immediate priority for the euro area should be bringing inflation further down, while preserving financial stability and growth," he added.
Throughout the week, European policymakers have relentlessly emphasized that the next interest rate hike by the ECB in July is a done deal. However, if inflation in the eurozone actually slows down more than economists expect on Friday, the chances of a pause in September will increase significantly, which could put pressure on the euro.
As for the technical picture of EUR/USD, in order for buyers to regain control, they need to climb above 1.0925 and hold above that level. This would make it possible for the pair to rise towards 1.0960 and 1.1010. From there, the exchange rate can climb to 1.1060, but doing so without new positive data from the eurozone would be quite challenging. In case the pair falls, I expect big buyers to be active around 1.0880. If there is no significant response there, it would be better to wait for a retest of the 1.0850 low or open long positions from 1.0800.
As for the technical picture of GBP/USD, demand for the pound has sharply declined, indicating the formation of a correction. One can expect the pair to rise after gaining control above the 1.2650 level, as a breakthrough of this range would strengthen hopes for further recovery towards 1.2700, after which a more significant upward move towards 1.2745 could be discussed. In case the pair falls, bears will try to gain control below 1.2600. If they succeed, a break below this range will strike a blow to the bulls' positions and push GBP/USD towards a low of 1.2570 with the prospect of reaching 1.2530.