EUR/USD Pair: ECB Raises Rates Due to Inflation Concerns

The European Central Bank (ECB) is likely to increase interest rates by 0.25% on Thursday. The decision is part of its efforts to control inflation. This move comes as the EUR/USD pair exchange rate shows signs of heading downward again, driven by anticipation of key US inflation data and upcoming monetary policy meetings by both the Federal Reserve (Fed) and ECB.

Technical indicators suggest that an Elliott wave ABC correction may have concluded at the recent high of $1.0787. If this is the case, the EUR/USD pair might eventually slip below the late-May low of $1.0636.

Immediate support levels were the most visible at the high of last Monday. Standing at $1.0723, with further support at the low of last week, at $1.0668. On the other hand, key resistance is established between the current June highs of $1.0779 to $1.0787.

EUR/USD Set for Downward Trend Ahead of Crucial Economic Events

Volatility is expected in the EUR/USD pair as investors await the outcomes of the upcoming rate decisions by the Federal Reserve and ECB. Economists predict that the ECB will raise rates in June and July due to inflationary pressures. However, the central bank is likely to pause its tightening cycle for the rest of the year due to persistent inflation concerns and the impact on the EUR/USD exchange rate.

Despite expectations of economic rebounds in both the eurozone and the United States, the ECB maintains an aggressive tightening stance. The eurozone, including Germany, has experienced a slowdown in economic activity over the past year, leading to a winter recession.

ECB’s Tightening Stance Amidst Economic Slowdown: Impact on Euro Zone

The Reuters poll of economists reveals unanimous agreement, which ECB issued recently. European Central Bank is planning to raise its deposit rate by 25 basis points on June 15. While economists anticipate another 25 basis point hike in July, bringing the terminal rate to 3.75%, they believe the ECB will maintain this rate level until the end of 2023. Diverging opinions exist among economists regarding future rate forecasts, with projections ranging from 3.50% to 4.00% by year-end.

Eurozone inflation currently stands at 6.1%, significantly exceeding the ECB’s target of 2%. Economists anticipate that inflation will remain above the target until at least 2025, with average rates projected at 5.5% for this year and 2.5% for the following year. Core inflation, which excludes volatile food and energy components, has slightly declined. According to analysts, it will most likely continue moderating in the coming months.

Expert Consensus: ECB Expected to Raise Rates, But Caution Persists

In technical analysis, the EUR/USD pair shows a downward trend, with resistance observed at the 1.0807 level. A breach and a sustained move above this level could indicate counter-trend buying, with the next target at 1.0979. Conversely, if the pair fails to overcome the resistance, strong selling pressure may resume, leading to a potential support target at 1.0522.

Overall, the EUR/USD pair faces volatility ahead of the rate decisions by the Federal Reserve and ECB, driven by inflation concerns and economic prospects for the eurozone and the United States.

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