The European Central Bank announced a 25-basis-point rate hike on Thursday, bringing its key interest rate to 2.25%, in line with market expectations. Against the backdrop of the ongoing Middle East conflict driving up energy prices, inflation in the eurozone is moving further away from the central bank's target. This decision makes the ECB the first major central bank to tighten monetary policy in response to rising energy costs, which have pushed eurozone inflation back above 3%. The ECB's Governing Council stated that the rate increase is aimed at addressing inflationary pressures stemming from the conflict. "The war in the Middle East is generating inflationary pressures. Regardless of how the shock evolves and its impact on the medium-term economic outlook for the euro area, the decision to raise rates is robust across a range of scenario analyses," the statement said.
Concurrently, the ECB revised its inflation projections upwards for the coming years. The central bank now expects average headline inflation in the eurozone to reach 3% in 2026, subsequently easing to 2.3% in 2027 and falling to 2% in 2028. The ECB attributed the primary reason for the forecast adjustment to a higher outlook for energy prices, with elevated energy costs anticipated to further feed into food, goods, and services prices.
In other news, data released by the U.S. Bureau of Labor Statistics on Thursday showed the Producer Price Index (PPI) rose 6.5% year-on-year in May, marking the largest increase since November 2022 and exceeding the market forecast of 6.4%. On a monthly basis, PPI increased 1.1%, significantly surpassing the expected 0.7%. Following the data release, market expectations for future rate hikes saw a slight uptick, with current focus centered on a potential single hike in 2026. This data, together with the Consumer Price Index (CPI) released earlier in the week, paints a picture of persistent inflationary pressures. Analysts believe these figures will reinforce external expectations for a Federal Reserve rate hike in 2026. With the labor market regaining momentum, curbing inflation has become the Fed's top priority. Notably, the core PPI, which excludes food and energy, rose 4.9% year-on-year, below the market expectation of 5.4%, and increased 0.4% month-on-month, also below the expected 0.5%, representing a relatively moderate aspect of this data set.
Key data to watch today includes the UK's April Industrial Production monthly rate, Germany's final May CPI annual rate, the UK's April GDP monthly rate, and the preliminary U.S. June University of Michigan Consumer Sentiment Index.
US Dollar Index
The US Dollar Index rose initially before retreating yesterday, closing slightly lower for the day. It is currently trading around 99.80. Safe-haven demand and heightened expectations for Federal Reserve rate hikes had initially supported the index's climb. However, profit-taking and comments from the U.S. President suggesting a potential deal with Iran, which cooled market risk aversion, led to the index's decline and eventual negative close. Additionally, weaker-than-expected U.S. economic data released during the session also exerted some downward pressure. Today, focus is on resistance near 100.30, with support located around 99.30.
Euro/US Dollar
The Euro traded higher in a choppy session yesterday, ending the day with modest gains. It is currently trading near 1.1560. Besides short-covering providing some support, a softer US Dollar Index, weighed down by cooling safe-haven demand, was a key factor underpinning the Euro's rebound. Furthermore, the European Central Bank's expected 25-basis-point rate hike during the session also lent support to the pair. Today, attention is on resistance around 1.1650, with support near 1.1450.
British Pound/US Dollar
The British Pound moved higher in a volatile session yesterday, closing slightly up. It is currently trading around 1.3400. A weaker US Dollar, pressured by soft economic data and easing Middle East tensions, was the main driver behind the Pound's strength. However, expectations for Federal Reserve tightening and concerns over UK political uncertainty limited the pair's upside. Today, watch for resistance near 1.3500 and support around 1.3300.
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