Will the ECB Go Back to Easing?

ECB officials are expressing conflicting views about whether rates are in line or need to be lowered slightly more, with key data from the US and the Euro Area on the horizon likely to affect the Eurodollar.

ECB Easing Ends or Not Yet?

At the start of the month, the ECB cut rates as was widely expected but then surprised the markets by heavily implying that . Of course, the central bank couched the projection with plenty of talk about market uncertainty. However, the tone of the ECB statement and President Christine Lagarde's comments seemed to align with the hawks, who argue that inflation pressures persist and interest rates are largely neutral. Since the meeting, some policymakers have voiced diverging views. As recently as Tuesday, France's Francois Villeroy was , arguing that inflation expectations were moderate and the recent spike in energy prices would likely abate.

This contrasts with the ECB's June bulletin published last Friday, which showed that. However, it did acknowledge downside risks for the economy and that the ECB would take a meeting-by-meeting approach. The lack of progress on economic growth was put into relief on Monday when flash Eurozone PMIs did not improve as much as expected, and manufacturing activity remained in contraction at 49.4 instead of the 49.8 that analysts had predicted. The survey also showed that input cost inflation eased for the fourth consecutive month, the lowest since November, despite the flare-up of the trade war. ECB's Joachim Nagel of Germany admitted on Tuesday that it is unclear whether tariffs are inflationary or deflationary and that the ECB should remain flexible in its approach.

Upcoming CPI to Offer Some Clarity

Better insight into the current state of consumer prices and tariffs can be expected around the weekend, with the release of flash CPI estimates for June from various European countries. The French CPI is released on Friday and is expected to accelerate to 0.9% from 0.7%. Then on Monday, German CPI is expected to tick up to 2.2% from 2.1%. However, this comes amidst the .

The EURUSD also depends on what is happening in the US. The dollar has been weakening since it appears , which has allowed the currency pair to surge. However, signs of a solid economic recovery in the US or rising inflation that would keep the Fed from cutting could give the greenback a boost. US durable goods for May come out on Thursday and are expected to post a recovery, growing at 6.8% compared to -6.3% in the month before.

EURUSD Still Biased to the Upside

The EURUSD pair continues to encounter resistance near the 1.16 round level, with the VWAP sloping higher suggesting an upside bias towards the next psychological levels at 1.1650 and 1.17 if bulls can form support at 1.1635. However, with the RSI near the overbought zone, a double-top formation could see prices revert to the VWAP average of 1.1491 if the ascending ‘autotrend’ support at 1.1525 gives way to bears, exposing 1.1459, followed by the VWAP low at 1.1342 sitting below 1.14 and 1.1350.

Source: SpreadEx / EURUSD

Key Takeaways

ECB officials show conflicting views on whether interest rates need to be lowered further or if they are already at a neutral level. The June bulletin showed that inflation is expected to stabilise around the bank's target, but it acknowledged downside risks for the economy. Upcoming data releases from the US and Euro Area, such as the flash CPI estimates for June from various European member countries and US durable goods orders, might provide more clarity on the inflation outlook, influence the ECB's monetary policy stance and the euro. Meanwhile, Fibre continues to show an upside bias, but its direction will likely depend on factors such as the de-escalation of tensions in the Middle East and the strength of the US economic recovery.