The euro has made significant gains against the US dollar following lower-than-expected core CPI data in the eurozone. Recent statements from European Central Bank (ECB) President Christine Lagarde, stating that there is no clear evidence of inflation peaking, have bolstered traders' confidence in the central bank's plan to raise interest rates later this year. This has had a positive impact on EUR long positions.
Consumer prices in May, excluding energy and food prices, rose by 5.3% compared to the previous year, following a 5.6% increase in April. These figures fell below economists' average estimate of 5.5%. The overall indicator experienced a more noticeable decline and reached 6.1%, the lowest level in over a year. This drop was primarily driven by reduced energy spending.
Investors were not surprised by these results, as recent cooler inflation data in the leading economies of the eurozone signalled a more active easing of price pressure. However, as previously mentioned, ECB officials are committed to their unprecedented campaign of monetary policy tightening, despite Germany recently slipping into a technical recession. "There is no clear evidence that underlying inflation has peaked," Lagarde said. "We have made clear that we still have ground to cover to bring interest rates to sufficiently restrictive levels."
Many economists and ECB policymakers also believe that it is too early for the ECB Governing Council to relax. Base effects and statistical distortions can quickly reverse the May price decline, potentially driving core inflation higher throughout the summer. Market participants anticipate another quarter-point hike on June 15th and believe that the rate hike cycle will only conclude after an additional increase this autumn. Martins Kazaks, the head of the Latvian central bank, cautioned that current rates may not entirely reflect reality. Policymakers are confident that achieving the target inflation rate of 2% will contribute to sustainable economic growth and financial stability. Until that moment, the regulator will have to combat elevated price pressures.
Meanwhile, the ECB issued a warning this week that monetary policy tightening can lead to negative disruptions in financial markets and tests the resilience of households, businesses, governments, and the real estate sector.
On the technical side, the euro has begun a correction. EUR/USD bulls will need to hold on to 1.0740 and regain 1.0770. This would open the way towards 1.0800. A breakout above that level could open the path to 1.0835. However, achieving that would be difficult without support from positive eurozone fundamentals and weak US data. If the pair declines, significant bullish activity is expected only around 1.0740. If bulls are idle there, it may be a good idea to wait for EUR/USD to hit a new low to await a new low around 1.0700 or consider opening long positions from 1.0666.
Demand for the pound remains. GBP/USD may increase after establishing control over 1.2540. A confirmation of this breakout would make further upward movement towards 1.2580 more likely, potentially paving the way for a sharper upward move towards 1.2610. If GBP/USD declines, bears will attempt to gain control below 1.2500. Should they succeed, a breakout of this range would put pressure on bullish positions, potentially pushing GBP/USD towards the low of 1.2470 and opening the way towards 1.2440.
