FX.co ★ Policy differential of US Fed and ECB to lend helping hand to EUR

The euro obviously benefits from the ECB's intention to raise interest rates higher. EUR has been picking up steam versus the US dollar. In the context of the policy differential of the Federal Reserve and the ECB, the euro buyers will soon grasp the chance of pushing the price up above the long-awaited resistance at 1.1000. We will discuss the technical picture a bit later. Now I'd like to have a glimpse of recent comments by some ECB policymakers. They share the viewpoint that the policy of rate hikes until the year end will not inevitably lead to an economic slowdown and a recession.

European Central Bank Governing Council member Giannis Stournaras said yesterday that that central bank could complete the cycle of rate hikes this year, but warned monetary tightening would unlikely trigger an economic downturn. "It is important to be careful about our next steps, which should be gradual and measured," Stournaras said at an Economist event in Athens on Monday. "At the same time, we must do everything to contain inflation, ensuring financial stability and preventing a recession in the economy."

Let me remind you that last week the ECB raised the cost of borrowing by another quarter of a point. In the ECB's revised forecast, inflation is expected to be above the target level of 2% even in 2025. Interestingly, while some members of the Board of Governors have warned that monetary tightening may be required even after the summer, others are afraid to speculate on the results of the September meeting, as it is too early to draw definite conclusions.

"We should not underestimate the risk that the effects of the monetary policy measures we have already taken will be stronger than expected," Stournaras said. "We are close to the end of the interest rate hike cycle, although not quite there yet. We will raise rates to levels that are acceptable and that will contain inflationary pressure."

More recently, European Central Bank Vice President Luis de Guindos also spoke, saying that inflation is sure to come down, but the ebb tide in underlying price pressures may not be as fast as expected.

For the time being, the European Central Bank is now focusing on the core consumer price index, which excludes volatile categories of goods. Therefore, it is possible that a change in this indicator will have a greater impact on the regulator's decision on interest rates in September.

"There is no doubt that inflation will ebb away," Guindos said yesterday. "However, core prices may bump against additional restrictions." As early as Friday, the policymaker said that interest rates might need to be raised after the summer break. At the same time, Belgian counterpart Pierre Wunsch warned that rate hikes would continue even after September if core inflation did not loosen its grip. "What I'm sure of is that inflation will come down pretty quickly to our target of 2.0% in the next couple of years," the policymaker said on Monday.

As for the technical picture of EUR/USD, if the buyers want to ensure control, they need to take hold of 1.0930 and climb above 1.0970. This will allow the price to get out to 1.1000. Already from this level, the door will be open to 1.1030, but it will be quite problematic to seize this level without strong inflation in the eurozone. In case the trading instrument goes down, I expect any serious actions from large buyers only in the area of 1.0900. If no one is there, it would be a good idea to wait for the update of the low at 1.0860 or open long positions from 1.0820.

As for the technical picture of the GBP/USD, the demand for the pound remains buoyant. Traders could count on the pair's growth after taking control of 1.2800 and 1.2840. Only a break of the last level will strengthen hopes for further recovery to the 1.2880 area, after which it will be possible to talk about a sharper upward move to the 1.2920 area. If the instrument falls, the bears will try to take control of 1.2760. If they cope well, a break of this range would hit the bulls' positions and push GBP/USD to a low of 1.2710 with the prospect of an exit to 1.2660.