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FX.co ★ EUR/USD. ECB supports euro

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Forex Analysis:::2023-06-16T15:04:42

EUR/USD. ECB supports euro

The European Central Bank's (ECB) most recent meeting drew to a close yesterday with an unexpected degree of clarity from the EU regulator. Market participants had widely anticipated the official result - a rate hike of 25 basis points. But what remained unclear until yesterday were future prospects for monetary policy tightening. Given the vague outcome of the Federal Reserve's June meeting, the ECB was under pressure to provide concrete guidance. To everyone's surprise, the European regulator was strikingly unambiguous in its declarations.

The hawkish signals echoed by the ECB gave the euro substantial support, allowing the EUR/USD pair to finally break out of the 1.0650-1.0770 range in which it had been trading for almost three weeks. Now, euro bulls are creeping towards the 1.1000 level, indicating the boundaries of a new price level. Essentially, the ECB has become a steadfast ally for the euro, whereas the Fed has left the greenback to grapple alone with US inflation, the trajectory of which will dictate the Fed's next moves.

ECB's verdict

The European Central Bank has raised interest rates by 25 basis points. Christine Lagarde, the central bank's president, made it clear that the ECB has no intention of resting on its laurels. She asserted the bank's focus on achieving its inflation target and stated another hike at the next meeting in July was "highly likely". Lagarde pointed out that wage growth and companies raising prices to bolster their profits were becoming increasingly important inflationary factors. Thus, despite a downward trend in inflation indicators, she thinks inflation would remain too high for too long. In this context, Lagarde pronounced a pivotal statement for the euro, claiming that the ECB was not even thinking about taking a break from hiking rates.

Furthermore, the regulator dismissed rumors that it may lower rates by the end of the current year. An accompanying statement noted that they would be maintained at their reached levels as long as necessary.

EUR/USD. ECB supports euro

As for macroeconomic forecasts, the ECB's decisions also favored the euro. The regulator upgraded its general and core inflation growth forecasts for 2023 and 2024. According to the new projections, consumer price inflation in the eurozone this year will be 5.4%, 3% next year, and 2.2% in 2025. March forecasts placed inflation at 5.3%, 2.9%, and 2.1%, respectively. Core inflation, excluding food and energy prices, is expected to stand at 5.1% this year before slowing to 3% in 2024 and 2.3% in 2025. However, the ECB has downgraded its expectations for EU economic growth. The GDP growth forecast for the eurozone in 2023 has been reduced to 0.9% from the previously expected 1%. The outlook for 2024 has been trimmed to 1.5% (from 1.6%), while the economic growth rate estimate for 2025 remains unchanged at 1.6%.

Aftermath of June meeting

The ECB's rate hike, coupled with the Fed's pause, has narrowed the spread against the US central bank. Market participants are confident the European regulator will bump up rates by another 25 basis points at its July meeting. Furthermore, whispers of a potential September hike are circulating. This decreasing policy gap between the Fed and the ECB is welcome news for EUR/USD buyers.

Effectively, Christine Lagarde has promised another rate hike at the next meeting and didn't rule out a further tightening of monetary policy. This comes even as the latest inflation growth release for the Eurozone entered the 'red zone', indicating a decline in the consumer price index.

In hindsight today, ECB's Robert Holzmann stated that there was not yet a consensus among the European regulator's policymakers about what should happen to rates post-July's increase. He hinted that inflation indicators would play a key role in determining the future course. If inflation continues to be 'stubbornly high', the central bank will need to take 'further rate actions', he said.

Meanwhile, the Fed already hit the pause button this month and doesn't rule out a wait-and-see stance at upcoming meetings. Essentially, the American central bank has pegged its future potential moves to the dynamics of US inflation.

Conclusions

The current fundamental backdrop is favoring further upside movement of EUR/USD. At present, bulls are edging towards the 1.0970 resistance level (the upper boundary of the Kumo cloud on the D1 chart). Surpassing this target will pave the way towards the next price barrier at 1.1080 (the upper line of the Bollinger Bands indicator on the weekly chart).

Analyst InstaForex
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