- The European Central Bank meeting will clarify the outlook for EURUSD.
- The dollar is failing to capitalise on the favourable backdrop.
The US dollar has ignored the escalation of geopolitical tensions in the Middle East and the fall in stock indices. Neither its status as a safe-haven asset nor the deterioration in global risk appetite has helped. Moreover, following the report that consumer inflation accelerated to 4.2% in May, the chances of a Fed rate hike by the end of the year fell from 73% to 69%. Investors noted the month-on-month slowdown in price growth, which was interpreted as signalling that inflation had peaked. A subsequent decline in CPI growth will allow the central bank to keep rates on hold.
Pressure on the US dollar is being exerted by the oil market’s adjustment to supply disruptions and by expectations of the ECB’s rate-hiking cycle starting on 11 June. Markets are confident of a 25-basis-point hike in the deposit rate to 2.25%, amid evidence that high energy prices are beginning to feed through to core inflation. The central bank is expected to cut its GDP growth forecasts and raise its CPI projections.
Bloomberg experts are forecasting two rate rises by the end of the year: in June and September, though some believe this could happen as early as July.
At the same time, investors warn that the European Central Bank could repeat a past mistake. According to TS Lombard, the 2011 rate rise was a policy error. At present, the ECB is more focused on inflation expectations and the scars left by 2022. Back then, it was too late to start tightening monetary policy.
2011 is not the only instance in which rate cuts followed hikes. A similar mistake was made in 2008, shortly before the global financial crisis.
Nevertheless, the ECB’s focus remains firmly on preventing inflation from spiralling out of control. The European Central Bank is prepared to tighten policy now and ease it if necessary. Bloomberg analysts predict a cut to the deposit rate as early as March 2027.
The rise in borrowing costs in June is already reflected in EURUSD quotes. The pair’s reaction to the ECB meeting will depend on the updated forecasts and Christine Lagarde’s rhetoric.
