- Towards the end of last week’s trading, the euro was trading relatively steady against the dollar, following Thursday’s significant gains.
- Euro gains against dollar, EUR/USDextended to the 1.0970 resistance level, the highest in over a month.
- It settled around the 1.0940 resistance level at the start of this week’s trading.
In general, the picture of the eurozone economy has been mixed this year, but after the region slipped into a technical recession and raised interest rates again, some investors have become nervous about the economic environment.
The European Central Bank (ECB) raised interest rates by 25 basis points, raising the key interest rate to 4%. The deposit rate and the marginal lending rate rose to 3.5%, respectively. 4.25%. Unlike the Fed, which left US interest rates unchanged at the June FOMC meeting, the ECB is not expected to hit the pause button.
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Inflation has begun to decline, but is expected to remain very high for a long time. In its policy statement, the ECB said the Governing Council is committed to ensuring that inflation returns to its medium-term objective of 2% in due course. But some investors may ignore the central bank’s reassurances as inflation eases again.
On the economic side, the annual inflation rate fell to 6.1% in May from 7% in April, according to statistics agency EUROSTAT. This is in line with market estimates. The inflation rate stagnated month-on-month from 0.6% in April. Core inflation, which strips out the volatile components of energy and food, slowed to 5.3% year-on-year from 5.6%, in line with consensus estimates. The labor cost index fell to 5% in the first quarter from 5.6%. However, this was much higher than market expectations of 3.3%. Year-on-year wage growth also moderated to 4.6% in the January-March period, down from 5% and an above-expected 3.3%.
In the same week, ZEW Economic Sentiment fell to -10.0 in June from -9.4. Industrial production rose 1% month-on-month in April from -3.8% in March. Industrial production grew by only 0.2% year-on-year.
“After the ECB meeting, the implied probability of a July hike jumped from 50% to 80%, sending the euro higher against EUR/USD,” wrote Ipek Ozkardiyskaya, senior analyst at Swissquote Bank. The currency pair broke its 50-DMA to reach 1.0950, gaining more than 3% since the beginning of this month. The medium-term outlook remains bullish for the euro against the dollar due to the divergence between the hawkish European Central Bank and the overburdened Federal Reserve. The next target growth for the currency pair is 1.12.”
Elsewhere, EUR/JPY’s rally gained strength above 150 as the Bank of Japan (BoJ) decided to do nothing about today’s abnormally low interest rates, which look even more anomalous when you consider that the rest of the major central banks are either treading water. Or they say they will increase. USD/JPY is back above 140 as traders see no reason to buy the yen as the BoJ outlook remains unclear. He noted that some investors had at least expected a broader YCC policy of up to 1%, but the Bank of Japan had not bothered to make a change in that area.
According to the performance on the daily chart below, the EUR/USD currency pair continues to move upwards. Testing the 1.10 psychological resistance level will be important for the bulls to check the trend. This may push the currency pair to stronger bullish levels. On the other hand, it broke the 1.0840 support level, which is a return to bearish control in the trend. Today is a US holiday, so trading will be in narrow bands.
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