01.06.202317:35 Forex Analysis & Reviews: ECB hawks aid EUR/USD to counterattack

Playing Forex is like playing with bets. When investors believed that the aggressive tightening of monetary policy by the Federal Reserve would push the U.S. economy into a recession, the dollar would fall. The Fed was expected to lower borrowing costs by the end of 2023. And as soon as the market began to factor in the possibility of a rate hike in June, the American currency grew. The drop in the chances of monetary restriction from 60% to 25% allowed EUR/USD to launch a counterattack.

Final decisions are made by people, despite the policy of data dependency. The statement by Federal Reserve Governor Philip Jefferson about a pause in the rate hike process made the U.S. dollar vulnerable. In the end, a currency cannot rise or fall indefinitely. When things don't go as expected, it starts moving in the opposite direction.

The same can be said about the euro. The May slump in EUR/USD is due not only to news from the United States but also to the recession in Germany. Additionally, inflation has slowed in the four leading economies of the eurozone. As a result, consumer prices across the currency bloc fell to 6.1% in May, slightly deeper than expected by Bloomberg experts. In theory, this reduces the chances of a deposit rate increase. It's bad news for the euro.

Dynamics of European inflation

However, the growth rate of core inflation has decreased slightly, from 5.6% to 5.3%. Christine Lagarde stated that there is no clear evidence that prices in the eurozone have peaked. The Frenchwoman promised additional tightening of monetary policy. According to ECB Vice President Luis de Guindos, it is still too early to say that victory over inflation has been achieved. His colleague Madis Muller stated that more than one rate hike would be required.

One of the key "hawks" of the European Central Bank, Klaas Knot, warned the markets against expecting a reduction in borrowing costs in 2024. He believes that interest rates should remain at a peak for an extended period. Another member of the Governing Council, Olli Rehn, claims that the journey is not over. The minutes of the latest meeting in Frankfurt also indicate the ECB's determination. The dynamics of core inflation was perceived as alarming.

Thus, the U.S. dollar weakened based on Philip Jefferson's statement about a pause in monetary restriction by the Federal Reserve, which the short-term market did not anticipate. At the same time, the euro received support from numerous "hawkish" rhetoric of ECB representatives. Which trump card is stronger for EUR/USD? I believe it's the former. After all, the U.S. currency accounts for about 90% of all foreign exchange transactions on Forex. Therefore, market perceives news from Washington as more significant than from Frankfurt.

Technically, the return of EUR/USD to the fair value range of 1.0675–1.0995 is good news for euro enthusiasts. It is quite possible that the pair has reached its bottom and is trying to rebound from it. A breakthrough of resistance levels at 1.0725 and 1.0735 will be a reason for buying.