EUR/USD Steadies after its Post-ECB Drop, Awaits US CPI Inflation

Hawkish ECB

The European Central Bank (ECB) announced its intention to lift rates in July by 25 basis points and signaled more moves ahead, potentially of larger size. The bank also raised the inflation forecast for the current year, noting that the Governing Council "will make sure" of its return below the 2%. ^[1]

Despite the confirmation of the hawkish pivot and the initial reaction higher, EUR/USD posted a significant drop, while the GER30 also plunged, a combination that is a bit counter intuitive.

The ECB may have pointed to multiple rate hikes, but refrained from a more aggressive 50 basis points move in July, even though it opened the door for such an adjustment in autumn, while stressing once again the "optionality, data-dependence, gradualism and flexibility in the conduct of monetary policy".

More Hawkish Fed

The ECB's tightening path is far less aggressive than its major counterparts, including the US central bank. The Fed has already delivered 75 basis points worth of rate hikes and has telegraphed half-percentage increases for next week and July, while last week we saw a series of officials hinting to more tightening in September.

The last high profile commentary had come from Fed Cleveland President, Ms Mester, who is "not in that camp" of those who believe tightening should stop in September. She also added during the same CNBC interview, that she could "easily be at 50 basis points in that meeting". ^[2]

As such, monetary policy remains unfavorable for the common currency at this stage and so does the technical outlook, which has not changed. Markets now brace for the CPI Inflation update from the US, which requires caution as it can spark volatility and outsized moves.

EUR/USD Analysis

The Eurodollar initially reacted higher to the ECB announcement, but once again rejected the critical 38.2% Fibonacci of the 2022 High/Low drop (1.0786), which can eventually lead to a test of the 2017 multiyear-low (1.0339). However, it may be early for that, but it is highly vulnerable to sub-1.0500 moves.

On the other hand, EUR/USD catches a breath today and a low US CPI print could potentially help it, after having missed the chance to benefit from the ECB's hawkish pivot. Although we can see the pair reclaiming the EMA200 (black line), it will need a strong catalyst for another crack at 1.0786, while the daily Ichimoku Cloud looms large.