EUR/USD is trading on the defensive below 1.0950 in early Europe this Monday. The pair is weighed down by the US Dollar bounce and risk aversion, as investors digest US-Sino headlines amid mounting Chinese growth fears. ECB-speak will be in focus. US markets are closed on account of Juneteenth.
EUR/USD extended its weekly rally and reached its highest level since May 11 at 1.0962 on Friday before retreating modestly. Hawkish European Central Bank (ECB) rhetoric allows the Euro to outperform its rivals but the technical outlook points to overbought conditions in the near term.
The ECB raised its key rates by 25 basis points (bps) in June as expected. The policy statement revealed that Eurosystem staff revised core inflation projections for 2023 and 2024 higher. In the post-meeting news conference, ECB President Christine Lagarde all but confirmed one more 25 bps hike at the next meeting.
“Bearing a material change to our baseline, it is very likely the case that we will continue to raise rates in July, which probably doesn’t come as a surprise,” Lagarde told reporters. She also downplayed softer HICP readings from the Euro Area and reiterated that inflation is projected to remain “too high for too long.”
Lagarde’s hawkish tone, combined with upward revisions to inflation forecasts, fuelled EUR/USD’s rally on Thursday.
On the other hand, the US Dollar stayed under persistent selling pressure after disappointing Initial Jobless Claims data, which came in at 262,000 in the week ending June.
Ahead of the weekend, the University of Michigan’s Consumer Sentiment Survey for June will be featured in the US economic docket. With the Federal Reserve’s (Fed) blackout coming to an end on Friday, Fed officials are likely to comment on the policy outlook as well. The CME Group FedWatch Tool shows that markets are pricing in a 25 bps Fed rate increase in July. In case policymakers try to steer markets toward a rate increase at the next policy meeting, the USD could stage a rebound, causing EUR/USD to edge lower.
Nevertheless, ECB policymakers don’t seem to be wasting anytime to reassure investors about their intentions to stick to tight policy, allowing the Euro to hold its ground. ECB policymaker and Bundesbank Chief Joachim Nagel said that inflation risks are still tilted to the upside and Governing Council member Gediminas Šimkus noted that he wasn’t expecting a rate cut early next year.
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