The euro is currently trading in a narrow sideways channel, while the pound sterling is testing the lows of last Friday. Asides from disappointing data from China, there have been no events that could threaten the bullish prospects of these instruments.
With no key data releases out at this point, the recent interview of the European Commissioner for Economy, Paolo Gentioni, has attracted the attention of market participants. Gentioni rejected Germany's demands to reassess the fiscal policy of the currency bloc and stated that trying to force other member states to accept extremely strict policy rules was unrealistic.
During the interview, Gentiloni cautioned that the Commission's proposal for reevaluating requirements regarding debt reduction should be approached with considerable flexibility. The group's plan was initially devised to preempt perceived failures before the advent of the Covid-19 pandemic, which, according to Gentiloni, did not work. "I understand the German position, it is legitimate, but I don't think it is realistic to impose too-restrictive common benchmarks," Gentiloni said. "The reality is that the situation is very different among European countries. And it's difficult to have a restrictive benchmark fitting for everyone."
Naturally, countries grappling with high government debt and internal economic challenges, which rely on further domestic borrowing to address these issues, stand to benefit from such statements. Italy is a notable example of such a country, as it contends with the debts accrued during the coronavirus pandemic and the expenditures required to sustain economic growth.
The modernization of European fiscal rules has pitted countries such as France, Italy, and Germany against each other, with France seeking greater flexibility in reducing debt levels, while Germany is advocating for stringent, automatic rules that were previously enforced.
The European Commission, the EU's executive body, unveiled legislative proposals for reform in April and is aiming to secure an agreement among member states this year. The pact was put on hold during the Covid-19 pandemic until the end of 2023.
The Commissioner also said that the European economy is not facing stagflation, as production is still growing, albeit slowly. "We still have growth, and we expect in 2024 to have stronger growth. And we have an incredibly resilient labor market," Gentiloni said.
Recently, the Eurozone's economy has been struggling to gain momentum after a shallow recession it experienced over the winter. At the same time, core inflation remains high and is not slowing down as quickly as many expected, which keeps officials at the European Central Bank on edge. Consequently, market participants and economists expect a resolute monetary policy stance to persist in the Eurozone until at least spring next year. It is most likely that at the July policy meeting, the European Central Bank will raise rates by 25 basis points without hesitation, which will only give confidence to euro bulls.
On the technical side, EUR/USD bulls must push the pair above 1.1240 and consolidate there in order to maintain control over the market. This will open the way towards 1.1275 and 1.1310. From this level, the pair might possibly even reach 1.1350, but it would be quite challenging without strong statistic data from the Eurozone. If the trading instrument declines, notable buyer action is anticipated around 1.1210. If bulls are idle at this level, it would be a good idea to wait for the pair to hit a new low at 1.1170 or open long positions at 1.1130.
As for the technical picture of GBP/USD, demand for the pound remains quite good, indicating the bullish trend is continuing. The pair can be expected to rise after surpassing 1.3140. A breakout above this level will make further recovery towards 1.3170 more likely. Afterwards, GBP/USD might make a sharp upward surge towards 1.3200. If the pair declines, bears will try to take control around 1.3070. If they succeed, a breakout below this level will strike a blow to bullish positions and push GBP/USD towards a low of 1.3030 with a prospect of reaching 1.2980.
