The euro remains afloat even after Friday's remarks by Federal Reserve officials. They strongly stated that the committee did not intend to stop the cycle of interest rate hikes forever. It is possible that Christine Lagarde's speech and the unclear signals about the ECB's plans helped the euro keep its position on Friday. The currency dropped just slightly below its monthly low and then quickly recovered. We will discuss the technical picture a bit later.
The ECB President noted that inflation remained unconquered but preferred not to touch upon the prospects of the September 14 meeting. Instead, she allowed her colleagues to publicly discuss the need to raise borrowing costs. Important data for August will be disclosed soon. Only after that, traders will have a chance to draw conclusions about the results of the September meeting.
Consumer price data will set the stage for one of the most concerning decisions since the ECB began raising rates over a year ago. The fact is that officials wonder whether further tightening of monetary policy is a must or whether the economic outlook is grim enough to justify another hike.
Many analysts and market participants believe that although the rate hike in September is debatable, taking into account core inflation, the ECB will raise rates. The eurozone inflation data that will be published this Thursday is of great importance. According to economists' surveys, core inflation, excluding energy and food prices, is expected to decrease only to 5.3% in August from 5.5% in July. The ECB will clearly find this slowdown insufficient to pause the rate hike cycle. Core inflation, which still more than doubles the ECB's 2% target, is one of the reasons for the euro to remain afloat and not sink towards 1.06 or even 1.05.
Recently, most ECB policymakers emphasized that their decisions would depend on data. If the data unveils a decline and August inflation does not surprise economists, the ECB might consider a pause. However, this is currently hard to believe. Although weak PMI figures decreased the likelihood of an ECB rate hike in September, markets still anticipate another hike.
Regarding today's technical picture for EUR/USD, the pair continues losing value. To regain control, buyers should keep the price above 1.0805. This would pave the way to 1.0835. From there, the price may climb to 1.0875. However, it would be quite difficult without support from major traders. If the pair drops, I expect significant actions from major buyers only around 1.0805 and 1.0770. If they fail to be active, it would be wise to wait for a low of 1.0740 or consider long positions from 1.0705.
Meanwhile, pressure on the pound sterling remains the same. The pound sterling will rise only after bulls gain control over 1.2610. Regaining this range will boost hopes for recovery to 1.2650, after which we can talk about a surge to around 1.2690. If the pair falls, bears will attempt to take control over 1.2580. If they succeed, a breakout of this range will hurt bulls' positions and push GBP/USD to a low of 1.2545, with the potential to drop further to 1.2480.