ECB Hikes Slow Inflation and Strengthen Euro

Euro Forex Playbook for June

DERBYSHIRE GB / June 19th, 2023 - Updated with information on ECB meeting and inflation. Next update scheduled for after the 23rd of June, or before if any significant event occurs.

This is the Euro Forex Playbook and is intended to be used as a guide to aid in your trade planning.

Macroeconomic Snapshot

The macroeconomics situation of the Euro Area (EA) is mostly indifferent but is likely to improve. This is expected to reduce downward pressure on the Euro’s value.

June Meeting of the European Central Banks, Governing Council

• The Main Refinancing Operations rate was hiked by 0.25% in June to 4.00%, matching the 0.25% hike in May

• The next meeting is on Thursday the 27th of July

• The hiking cycle has risen as anticipated although is not expected to rise much further. This is likely to lead to stabilised bond yields which may limit their appeal to investors. This is expected to apply indifferent support / pressure on the Euro’s value.

GDP Growth Rate Third Estimate for Q1 2023

• GDP in the EA for Q1 slowed to a 0.1% quarterly contraction from 0.0% in Q4 2022

• The flash Q2 report is due on Monday the 31st of July

• The economy has contracted against anticipations but is expected to grow again. This is likely to lead to increased stock market prices and a shift in investor preference away from safer assets, such as government bonds. This is expected to apply upward support on the Euro’s value.

CPI Final for May

• CPI in the EA for May slowed a lot to 6.1% annual inflation from 7.0% in April

• The flash June report is due on Friday the 30th of June

• CPI has fallen faster than anticipated and is expected to fall much further. This is likely to lead to lower interest rates and a shift in investor preference away from safer assets, such as government bonds. This is expected to apply downward pressure on the Euro’s value.

Labour Report for April

• Unemployment in the EA for April fell slightly to 6.5% from 6.6% in March

• The May report is due on Friday the 30th of June

• The labour market has improved slightly better than anticipated but is expected to deteriorate. This is likely to lead to reduced growth and a shift in investor preference towards safer assets, such as government bonds. This is expected to apply downward pressure on the Euro’s value.

Russian-EU Gas Dispute

• The Russia-EU gas dispute has caused an increase in the cost of energy which has reduced the spending power of consumers and resulted in slower economic growth. This is likely to lead to reduced foreign investment in the stock market and is expected to apply downward pressure on the Euro’s value.

Russian Invasion of Ukraine

• The war is having a detrimental effect on the global and EA economy by causing higher energy prices, supply chain disruptions, financial market volatility, refugee crisis and geopolitical uncertainty

Previous Three Months (March to May)

The Euro has gained value in the past three months from March to May, however it did start to fall from the highest level of 1.10 in April. This weakness can be attributed to a more valuable dollar as investors pricing in interest rates staying higher for longer. This is because the Fed has not made any dovish statements or considered cutting rates after the banking crisis.

Month to Date (June)

The Euro has gained value through this month having climbed from its low of 1.06 at the start of the month towards 1.09 today. This can be attributed to dollar weakness as the Fed paused hikes, US inflation is falling and a sentiment of disbelief that the Fed will continue to hike this year as was indicated by the updated projections.

EUR/USD Outlook

The events to keep an eye on:

• Monday the 19th of June

  • US National Holiday Juneteenth

• Tuesday the 20th of June

  • FOMC Member Williams Speaks historically neutral regarding rates

• Wednesday the 21st of June

  • Fed Chair Powell Testifies historically neutral regarding rates

  • FOMC Member Goolsbee Speaks historically dovish regarding rates

• Thursday the 22nd of June

  • Fed Chair Powell Testifies historically neutral regarding rates

• Friday the 23rd of June

  • EU Services, Manufacturing PMI’s

  • US Services, Manufacturing PMI’s

CME Group 30-Day Fed Fund futures

• July: falling sentiment of a 0.25% hike, 70% in favour

• September: slightly falling sentiment of a hold, 65% in favour (25% for a 0.25% cut)

Long Term Value of the Euro to Remain Steady, US Dollar to Steadily Decline : As the EA economy stagnates, investors are unlikely to return with any significance. Moves are expected to remain below the three month high of 1.10 unless there is significant dollar softness..

Short Term Value of the Euro to Remain Steady, US Dollar to Stabilise: As The ECB are continuing to hike but at a slower pace and at lower levels than other central banks. This may be a positive to consumers but could limit the fall of inflation. Moves are expected to remain near current levels of between 1.06 and 1.09 unless CPI remains stubbornly high which could send it for a retest of 1.10.

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Gavin Pearson

• Retail trader since 2008

• Specialises in forex G7 currencies

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