Forex Market: EUR/USD at fresh one-month high as ECB delivers 8th rate hike, signals more tightening

Key points

EUR/USD scaled a fresh one-month peak on Friday, after the European Central Bank delivered an eighth consecutive interest rate hike at its June policy meeting and flagged further tightening.

The ECB raised the rate on main refinancing operations by another 25 basis points to 4%, a level not seen since the 2008 financial crisis.

Additionally, the rate on the deposit facility was raised to 3.5%, a 22-year high.

ECB President Christine Lagarde said during a press conference following the policy decision that the bank had more ground to cover and it would likely keep hiking rates in July.

The central bank’s decision came even as the Euro zone entered a recession at the start of the year and as both the headline and core inflation rates remained considerably above the bank’s 2% inflation target.

The ECB also revised up its inflation forecasts and revised down its economic growth forecasts for 2023 and 2024.

“The biggest hawkish surprise was the upward revision to 2024 and especially 2025 inflation forecasts,” Deutsche Bank economists wrote in a client note, cited by Reuters.

“Our baseline expectation is a final 25 bps hike in July to a terminal rate of 3.75%. The risks remain clearly to the upside.”

The ECB’s policy decision came one day after the Federal Reserve kept borrowing costs without change after delivering ten successive rate hikes.

Yet, the Fed indicated that interest rates might still need to rise by 0.5% by the end of the year.

Gains in the US Dollar were subdued on Friday following a string of soft US macro data. US import prices registered their steepest year-on-year drop since May 2020, falling 5.9% in May, data showed on Thursday. It has been a fourth consecutive month of price declines.

US industrial production shrank 0.2% in May from a month earlier, while confounding market expectations of a 0.1% rise. Mining output decreased 0.4% month-over-month mostly due to drops in coal mining and support activities.

US manufacturing production, however, increased at a monthly rate of 0.1% in May, while easing from a revised down 0.9% surge in April.

A separate report by the US Department of Labor showed the number of Americans filing for unemployment benefits had remained steady at the seasonally adjusted 262,000 in the week ended on June 10th. It has been the highest number of claims since October 2021 and well above market consensus of 249,000.

On the other hand, US retail sales surprisingly rose 0.3% in May from a month earlier, suggesting resilient consumer spending despite persistent inflation and higher borrowing costs.

The US Dollar Index registered a one-month trough on Thursday after data releases. It was last up 0.08% to 102.223.

As of 9:26 GMT on Friday EUR/USD was inching up 0.01% to trade at 1.0945. During the late phase of the Asian session the major Forex pair went up as high as 1.0962. The latter has been the pair’s strongest level since May 11th (1.0998).