European Central Bank officials have begun to worry that the rapid appreciation of the euro could undermine efforts to keep inflation at 2%.
The euro has risen by about 14% against the dollar this year as confidence in the US has waned. This has helped to keep inflation in check, which is currently in line with the European Central Bank’s target. However, the danger is that the euro’s appreciation could push up inflation, causing it to fall below the target and thereby undermining competitiveness.
As the euro is set to enjoy its longest rally in more than two decades, the topic has come into focus at the European Central Bank’s annual meeting in Sintra, Portugal. Luis de Guindos, the vice president of the European Central Bank, has warned that a euro-dollar exchange rate above 1.20 would cause problems.
“Before this, we can sort of ignore it,” he told Bloomberg Television’s Francine Lacqua. “Things beyond this range get a lot more complicated.”
The euro’s rise is largely attributed to the weakness of the US dollar, as Donald Trump’s tariff offensive has undermined market confidence, causing investors to flee the United States. This shift was initially welcomed not only for its anti-inflationary properties but also as an opportunity to enhance the status of the common European currency on the world stage.
The question now is how far it can go. Traders expect that the threshold mentioned by Gindos will be reached in 2026.
Philip Lane, chief economist of the European Central Bank, told CNBC: “European investors, and global investors, are making some rebalancing adjustments to the euro. The situation we are seeing now seems likely to continue, but of course we are very curious to see what happens next.”
A series of comments on the euro – many of which go beyond the ECB’s standard line that the currency is one of many factors it assesses and does not set a specific target level for – suggest that at least some policymakers have become less at ease.
“They are not willing to admit it yet, but a strong euro will become increasingly worrying,” said Carsten Brzeski, chief macroeconomist at ING. “Ultimately, a further strengthening of the euro will not only bring greater deflationary pressure, but also pose a risk of economic damage to the already hard-hit export sector – which is enough to justify further interest rate cuts.”
Latvian central bank governor Martins Kazaks also discussed the eight cuts in deposit rates in another interview. The market and analysts expect that after the pause in deposit rates in July, the deposit rate will be cut again this year to 1.75%.
“The euro’s exchange rate has fluctuated significantly this year, which will also put pressure on inflation,” Kazaks said. “If the euro appreciates further significantly, it will put pressure on inflation and exports, which may prompt another interest rate cut.”
Technical analysis:
Gold: The price continued to rise yesterday with almost no decent pullback. We will maintain the yellow + green combination strategy unchanged. However, there is ADP data tonight and we will have a live broadcast, so we move the yellow liquidity low long strategy up to around 3220. For detailed positions, please consult the plugin.
The plugin is updated from 12:00 to 13:00 every trading day. If you want to experience the same plugin as shown in the picture, please contact V: Hana-fgfg and note “666” in the message.
Nasdaq: Yesterday, we provided two yellow zones in the plugin to wait for the price to fall back and sweep for low liquidity to go long. Eventually, the second yellow zone perfectly captured the price’s pullback. The intraday strategy needs to be slightly adjusted. If the price breaks through the blue zone, you can consider the momentum strategy appropriately; at the same time, continue to wait for low liquidity near 22,300 to buy. For detailed positions, please consult the plugin.
(NASDAQ 15-minute chart)
The plugin is updated from 12:00 to 13:00 every trading day. If you want to experience the same plugin as shown in the chart, please contact V: Hana-fgfg and note “666” in the message.
Crude oil: The strategy we alerted through the plugin yesterday could achieve a profit-loss ratio of around 1:1. Today, we suggest reducing positions and setting protective stops before continuing to hold. If opening new positions intraday, wait for a secondary momentum break above the 66.50 level before considering a pullback buy. For detailed positions, please consult the plugin.
(Crude Oil 15-Minute Chart)
The plugin is updated from 12:00 to 13:00 every trading day. If you want to experience the same plugin as shown in the picture, please contact V: Hana-fgfg and note “666” in the message.
Key economic data and events to focus on today:
17:00 Unemployment Rate in Eurozone for May
20:15 US June ADP Employment Change (thousands)
