Euro focuses on the ECB

The US Dollar has retreated, despite rising oil prices and the resulting increase in US Treasury yields. Houthi attacks on tankers in the Red Sea have heightened geopolitical risks and catalysed the rally in Brent crude. The situation was further exacerbated by supply issues in Russia and Kazakhstan due to Ukrainian drone attacks on Black Sea infrastructure, as well as a reduction in traffic through the Strait of Hormuz to nine vessels and through the Strait of Bab al-Mandeb from 44 to 29, according to Kpler. 

Rising oil prices are increasing the risk of accelerating inflation and prompting central banks to tighten monetary policy. The futures market puts the odds of the ECB and the Fed raising rates in September at 90% and 77%, while the probability of two hikes in 2026 stands at 60% and 56%, respectively. The European regulator is expected to make the first move. Investors do not expect a rise in the deposit rate at its July meeting but are counting on hawkish rhetoric from Christine Lagarde. This is providing a tailwind for EURUSD, helping the pair overcome obstacles such as the rally in Brent crude and Treasury yields.

The rise in consumer prices in the eurozone from 1.9% in February to 3.2% in May prompted the ECB to raise its deposit rate by a quarter point to 2.25% at its previous meeting. However, in June, the CPI slowed to 2.8%, providing a reason to pause the tightening cycle. Nevertheless, according to Governing Council member Yannis Stournaras, the resurgence of conflict in the Middle East has brought the European Central Bank back to the forefront in the fight against inflation. 

Markets are buying EURUSD in the hope that Christine Lagarde will signal another hike in September. The major currency pair is rising on rumours, despite an unfavourable backdrop. Will the Frenchwoman’s rhetoric at the press conference provide grounds for selling the euro based on actual data?

Meanwhile, rumours that the Bank of Japan may resume tightening sooner than markets previously expected have pushed USDJPY lower. According to a Reuters poll, 53% of 51 experts forecast an increase in the overnight rate from 1% to 1.25% by December, with 35% expecting a rise in October. A Bloomberg insider claims there could be a move sooner than once every six months, which is what investors are currently anticipating. 

Summary: EUR/USD is rising on expectations of hawkish signals from the ECB, despite the rally in oil prices and Treasury yields; markets are awaiting Lagarde’s remarks.