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Abstract: The European Central Bank (ECB) raised rates by 25 basis points at its June meeting in line with expectations and formally decided to end Asset Purchase Program (APP) reinvestment starting in July. Policymakers revised upward their forecasts for both underlying and headline inflation going forward. Importantly, the forecast for 2025 is 2.2%, above the ECB's target. Lagarde, President of the ECB, said there is a "high probability" that interest rates will be raised again in July. While no guidance was provided regarding rates beyond that, she reiterated the mantra of a known destination with an unknown journey.

Fundamentals

For global markets, a slowdown in inflation is indeed a positive sign, except for Europe. The ECB raised rates by 25 basis points at its meeting on Thursday, as expected, but unexpectedly also raised inflation expectations while leaving the door open for a rate hike in September.

Lagarde said that although the ECB is unlikely to raise interest rates in September, it will maintain the terminal interest rate level for some time compared to market expectations of a rate cut next year.

European policymakers now expect core inflation to average more than 5%, compared with a March forecast of just around 4.6%. This may sound a bit counterintuitive, as we have been witnessing a slowdown in inflation and economic activity in Eurozone countries, with the latest growth data signaling even a mild recession. For instance, Eurozone's overall inflation rate dropped from 7.0% in April to 6.1% in May, with decreases observed in energy, goods, and services inflation.

However, a strong labor market, along with the stickiness of the services sector and housing prices, keeps ECB policymakers vigilant and prepared for further rate hikes in July or possibly another hike in September. As we learned yesterday, the ECB remains concerned that a return to the 2% target would take too long. The September meeting will likely involve a major standoff between hawks and doves or result in some kind of compromise, where the hawks will get their last rate hike and the doves will get guidance to suspend rate hikes in the fourth quarter.

After the ECB meeting, the implied probability of a July rate hike jumped from 50% to 80%, pushing the euro higher against the U.S. dollar. The pair broke sharply above its 50-day SMA and touched 1.0950. Since the beginning of the month, the pair has gained more than 3%. In our view, the medium-term outlook for EURUSD remains bullish due to the divergence between a resolutely tough ECB and an exhausted Fed policy. The next bullish target stands at 1.12.

Technical Analysis

The euro continues to soar after the ECB raised interest rates for the eighth consecutive time due to rising inflation expectations. Since last week, the pair has been rising slightly along the uptrend line and has spiked above the supply zone at 1.0900, near the daily support level. The significant upward movement has almost entirely wiped out the remaining bearish sentiment. With the RSI entering overbought territory again, a correction will be inevitable, which is also an important driving force for consolidating the rally.

If the bulls continue to ride the trend, a break above the 1.0965 resistance zone could push the pair to the 1.1000 area in the near term. Closing above the 1.1000 level may further propel the pair to the resistance level at 1.1050.

Instead, the pair could start a correction to around 1.0915. The next major support lies around the connecting bullish trend line at 1.0860, below which EURUSD could test the support at 1.0785. Any further decline could bring the pair back to the 1.0740 level.

Overall, the trend for EURUSD is primarily bullish. In terms of trading strategy, buying the dips is recommended.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.0850

Target Price: 1.1200

Stop Loss: 1.0739

Valid Until: 2022-06-30 23:55:00

Support: 1.1915, 1.1906, 1.0860

Resistance: 1.0965, 1.0982, 1.1028