- The European Central Bank meeting will clarify the outlook for the EURUSD.
- The US dollar fails to capitalize on the favorable context.
The US dollar has ignored escalating geopolitical tensions in the Middle East and falling stock indices. Neither its status as a safe asset nor the deterioration of global risk appetite has helped. Additionally, 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 a sign that inflation had peaked.
A subsequent drop in CPI growth will allow the central bank to keep rates unchanged.
Pressure on the US dollar is being exerted by the oil market's adjustment to supply disruptions and expectations of the ECB's rate hike cycle beginning on June 11. Markets are banking on a 25 basis point increase in the deposit rate to 2.25%, amid evidence that high energy prices are starting to impact core inflation. The central bank is expected to reduce its GDP growth forecasts and raise its CPI projections.
Bloomberg experts predict two rate increases by the end of the year: in June and September, although 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 hike was a policy mistake. Today, the ECB is more focused on inflation expectations and the scars it will leave until 2022. Back then, it was too late to start tightening monetary policy.
2011 is not the only case where rate cuts followed hikes. A similar mistake was made in 2008, shortly before the global financial crisis.
However, the ECB remains firmly focused on preventing inflation from getting out of control. The European Central Bank is prepared to tighten policy now and ease it if necessary. Bloomberg analysts predict a deposit rate cut as early as March 2027.
The increase in financing costs in June is already reflected in quotes. The pair's reaction to the ECB meeting will depend on updated forecasts and Christine Lagarde's rhetoric.
He FxPro Analyst team
