FX.co ★ Does it make sense to expect rate cuts in Europe?

The euro did not enjoy demand today in the first half of the day. EUR/USD failed to update weekly highs which scared off the buyers of risky assets. We will talk about the technical picture below. Now I would like to comment on yesterday's speech by Philip Lane, Chief Economist of the European Central Bank, who once again warned the markets against false expectations of cutting interest rates over the next two years.

The euro did not enjoy demand today in the first half of the day. EUR/USD failed to update weekly highs which scared off the buyers of risky assets. We will talk about the technical picture below. Now I would like to comment on yesterday's speech by Philip Lane, Chief Economist of the European Central Bank, who once again warned the markets against false expectations of cutting interest rates over the next two years.

Let me remind you that at the beginning of this month, the European Central Bank raised its key interest rate by 25 basis points to 3.5% as the next move in the cycle of rising borrowing costs which has been going on since July 2022. The argument was still the same: record high core inflation throughout the eurozone. According to the latest data, the region's headline inflation was 6.1% year-on-year in May, much lower than 7% in the previous month. Core inflation, which excludes volatile food and energy prices, was 5.3% year-on-year. Both figures remained well above the ECB's 2% target.

During the speech, the former Governor of the Central Bank of Ireland said that the eurozone economy is in an "adjustment phase" as high interest rates cause wages to catch up with price increases. "I don't think the market should be asking itself questions about the timing or speed of lifting restrictive policies," Lane said. "We won't go back to 2% for a few more years. We will make good progress even this year, especially at the end of the year, but inflation will not fall to 2% in just two months."

His comments echoed those of ECB President Christine Lagarde, who also said yesterday that the central bank had made "significant progress" but "could not yet declare a victory over high inflation yet."

Market participants are now looking for another 25 basis points up in July this year and then another increase in September. But some economists suggest the ECB may have to halt further monetary tightening as higher borrowing costs push the eurozone economy into a downturn.

Earlier this month, the US Federal Reserve decided to pause the rate hike cycle. However, in later comments, Fed policymakers made it clear that it was a temporary measure needed to evaluate data. Hence, interest rates will continue to rise further.

You need to understand that even after the world's leading central banks decide to stop the cycle of raising interest rates, it will still be quite a long time before they are lowered. Certainly, policymakers are planning to keep rates restrictive to make sure that inflationary pressure is fully subdued and new shocks are out of the question.

As for the technical picture of EUR/USD, in order for buyers to maintain control, they need to climb above 1.0980 and consolidate there. This will allow the price to get out to 1.1010. Already from this level, it is possible to climb to 1.1060, but it will be quite problematic to do it without new positive data on the eurozone. In case of a decrease in the instrument only in the area of 1.0930, I expect some serious actions from large buyers. If no one is there, it would be a good idea to wait for the 1.0890 low to be updated or go long from 1.0840.

When it comes to the technical picture of GBP/USD, the pound sterling is still in demand, even despite a slight correction. GBP/USD is expected to grow after the bulls take control over 1.2760, as a break in this area will reinforce hopes for a further recovery to 1.2820. After this, it will be possible to talk about a rapid upward move of GBP/USD to 1.2880. If the pair falls, the bears will try to take control of 1.2690. If they assert their strength, a break of this level would hit the bulls' positions and push GBP/USD to a low of 1.2630 with the prospect of a slide to 1.2570.