Euro drifting lower on US holiday-thinned trading

• ECB’s Nagel says tightening could continue after July
• US inflation expectations fall to lowest level since March 2021

The euro has started the week quietly. EUR/USD is trading at 1.0917, down 0.22%. There is a bank holiday in the US and no eurozone releases on the calendar, which should mean a calm day for the euro.

ECB signals that rate tightening to continue

The ECB raised rates by 0.25% last week, bringing the benchmark rate to 3.50%. The central bank was late to the tightening party, after dismissing rising inflation as transient. Those days are long gone, and the ECB’s aggressive tightening campaign has pushed the benchmark rate to a 22-year high.

The rate hike last week was expected, but that didn’t prevent the euro from having a massive Thursday, gaining 1.05%. The euro received a boost from ECB President Lagarde’s press conference, when she said it would take a “material change” for the ECB not to raise rates in July. On Friday, some of the ECB hawks stated that more rates hikes could be needed after July, including Bundesbank President Nagel, who said a September hike might be needed.

In response, the markets have revised upwards the pricing of a July hike to 72% and a September hike to 54%. Lagarde has been tight-lipped about what the ECB has planned after July, but clearly there is some support within the ECB for further hikes after that.

In the US, UoM inflation expectations fell sharply to 3.3% in June, down from 4.2% in May and lower than the 4.1% consensus. This was the lowest level since March 2021 and is another indication that inflation is heading lower. The UoM Consumer Sentiment survey rose from 59.2 to 63.9, boosted by the drop in inflation expectations as well as the resolution of the banking crisis, according to the survey.

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EUR/USD Technical

• There is resistance at 1.0976 and 1.1031
• 1.0882 and 1.0805 are providing support

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