Following the results of the ECB meeting, the euro lost momentum, sliding into a downward channel. The US dollar, on the contrary, maintains its bullish bias. On June 9, the euro decreased significantly against the US dollar after the ECB meeting. The regulator kept the interest rate at the zero level. The central bank announced the end of asset purchases from July 1, 2022, launched as part of its APP program. The ECB plans to hike the key rate by 25 basis points in July and September. At the same time, it raised its forecast for annual inflation in the eurozone "significantly" to 6.8% this year from the previous figure of 5.1%. The watchdog also cut its growth forecast for the eurozone from 3.7% to 2.8% for 2022. It is hardly surprising that the euro has weakened eventually. On Friday morning, the EUR/USD pair was trading near 1.0636 after retreating from the previous high of 1.0770. Analysts believe that the pair is unlikely to break out of the downward range in the near future. Its trajectory will mainly depend on the movements of the greenback, the geopolitical situation, and the widening gap in the key rates of the ECB and the Fed.
The euro seems to have started a correction phase, trying to recoup some of its losses. A day earlier, the euro dropped by 1% versus the US currency after the ECB meeting. Today, investors are anticipating US inflation data, which may significantly impact the movements of the euro/dollar pair. According to preliminary estimates, in May, consumer prices are projected to soar to 8.3% year-on-year Analysts reckon that after the meeting, the ECB did not provide clues about the future plans for interest rate hikes in the EU. However, the regulator said that it would take measures it found appropriate regarding monetary decisions. The ECB announced that it would raise the key rate by 0.25% in July. It may also hike the cash rate by 0.50% in September 2022. At the press conference following the meeting, policymakers outlined factors that would continue to weigh on confidence and dampen growth despite rate hikes. They are also dragging the euro down. "Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter," ECB President Christine Lagarde said. "If we see inflation stabilizing at 2% over the medium term, a progressive further normalization of interest rates towards the neutral rate will be appropriate," Lagarde stressed. After that, the regulator raised its outlook for inflation to 2.1% in 2024. The indicator is above the target level of 2% but not too much higher than the level of core inflation.
Gloomy inflation forecasts forced the ECB to tighten monetary policy. Lagarde said that the regulator would hike the key rate gradually, constantly monitoring market conditions. By the end of the year, investors expect the key rate to total 1.4%. If this scenario comes true, the euro may recover. Another crucial factor that impacted the euro was the announcement of a mechanism aimed at calming concerns about the risks of financial fragmentation in Southern Europe during the period of rate hikes. The ECB strives to prevent the risks of financial fragmentation in the euro area. "Fragmented financial markets would obstruct the monetary policy transmission and undermine the possibility for the ECB to achieve its price stability," Lagarde stated. The ECB is ready to use its €1.85 trillion Emergency Purchase Program to mitigate the risks of fragmentation. Previously, these risks limited some countries' access to bond markets and pushed the euro down. The near-term prospects for the eurozone and the national currency have aggravated. The short-term business activity of the EU countries is affected by high energy costs and prices. Inflation risks have also increased.
