Euro flirts with 1.0900 as ECB hints at extra rate hikes

The European currency (EUR) now trades with marked gains and pushes EUR/USD to revisit daily highs in the 1.0880/90 band on Thursday. Indeed, spot sees its daily upside exacerbated after President Christine Lagarde advocated for an extra rate hike in July, at the time when she ruled out any pause in the bank's tightening campaign, all after the central bank raised the main financing rate to 4.00%, the marginal lending to 4.25% and the deposit facility rate to 3.50%.

The central bank anticipates that inflation will remain excessively high for an extended period. To address this, future decisions will prioritize maintaining sufficiently restrictive interest rates. The rates will be sustained at these levels for as long as it takes to address the issue effectively. The central bank will continue to adopt a data-dependent approach to evaluate the situation.

At her press conference, Lagarde reiterated that the bank still has work to do, and indicated that GDP is projected to pick up later this year, although manufacturing remains sluggish. She also proposed that governments reduce energy assistance measures, pointing out that the economy has been stagnant in recent months. Lagarde also stated that the reduction in inflation was broad-based, emphasising the importance of monitoring longer-term inflation expectations. Finally, she noted that both growth and inflation are quite unpredictable.

On the flip side, the USD Index (DXY) now returns to the sub-103.00 region and threatens to challenge Wednesday's multi-week lows near 102.70, as traders continue to assess the Fed meeting in a context so far dominated by the appetite for the risk complex. A glimpse at Wednesday’s FOMC gathering shows that the Federal Reserve has decided to maintain its current policy settings without making any changes. However, they have indicated that they anticipate a higher peak rate in the future, implying that any pause in adjustments might be short-lived.

Daily digest market movers: Euro now looks at a surpass of 1.0900

• The US Dollar gives away earlier gains and forces the USD Index (DXY) to shift its focus to Wednesday's lows.
• German 10-year Bund yields retreats from daily highs near the 2.55% level amidst the change of course in US yields across the curve.
• A sustained decline in the Greenback does not appear to be a done deal following the FOMC event on Wednesday and in light of the "live" meeting expected on July 26. Indeed, the Committee intends to resume raising interest rates, possibly as early as July. Furthermore, Jerome Powell indicated that a significant majority of the FOMC members are anticipating further tightening, and there were no objections. He clarified that the decision to refrain from hiking rates at the current meeting was not a "skip", while the July meeting may involve a discussion on increasing rates, and that the FOMC will evaluate each meeting independently before making any decisions.
• The growth projections for 2023 and 2024 have been revised downward in the ECB staff's latest forecasts.
• Final inflation figures in France are expected to confirm the persistence of disinflationary pressures, while the Balance of Trade in the broader Eurozone unexpectedly showed a €11.7B deficit in April.
• Data releases across the Atlantic could see Retail Sales cooling further, a worsening of the key Philly Fed Manufacturing Index and further loss of momentum in the labour market as per weekly Initial Jobless Claims, all suggesting the existence of cracks in the so-far resilient US economy.

Technical Analysis: Euro could extend gains once 1.0904 is cleared

Euro (EUR) needs to quickly surpass the so-far June top at 1.0893 (June 15) to see gains accelerate to the weekly top of 1.0904 (May 16) prior to the psychological 1.1000 mark. North from here, the pair could challenge the 2023 high at 1.1095 (April 26), which is closely followed by the round level of 1.1100 and comes ahead of the weekly top of 1.1184 (March 31, 2022). In addition, the latter appears propped up by the proximity of the 200-week SMA, today at 1.1182.

In case bears regain the initiative, there are no contention levels of significance until the May low of 1.0635 (May 31). The breach of this level could sponsor a deeper decline to the March low of 1.0516 (March 15) seconded by the 2023 low at 1.0481 (January 6).