LONDON (Reuters) – The euro held its ground on Thursday, above a two-month low, after European Central Bank (ECB) President Christine Lagarde said inflation remains too high and further policy tightening was necessary.
Data showed on Thursday that Inflation in the 20 nations sharing the euro eased to 6.1% in May from 7.0% in April, below expectations for 6.3% in a Reuters poll of economists.
But the current level is still more than three times the ECB’s 2% inflation target.
“Today, inflation is too high and it is set to remain so for too long,” Lagarde said in a speech.
“We have made clear that we still have ground to cover to bring interest rates to sufficiently restrictive levels,” she added.
The ECB has raised base rates by a combined 375 basis points to 3.25% over the past year to combat runaway prices.
Money markets are pricing in an 85% chance of a 25 bps hike when the ECB meets on June 15. Another 25 bps hike is expected in July, according to Refinitiv.
“We are holding firm on our ECB forecast of a terminal deposit rate of 3.75%, achieved by two 25 basis points hikes in June and July,” Simon Harvey, Head of FX Analysis at Monex Europe, said after Lagarde’s comments.
ECB Vice-President Luis de Guindos said on Thursday that the central bank has gone through most of its monetary policy tightening, but that cycle was not quite over yet.
The euro was flat on the day at $1.0692, off a two-month low of $1.0635 touched on Wednesday after some European countries released national inflation data showing signs price pressures have eased.
FED TO PAUSE
The dollar drifted from a two-month high as investors trimmed bets the Federal Reserve will raise interest rates this month, though a vote of approval from the U.S. House to suspend the debt ceiling lent some support to the greenback.
The dollar index, which measures the currency against a basket of six peers, flattened at 104.24, and was off a two-month high of 104.7 touched on Wednesday as traders pared back their expectations of another Fed rate hike this month.
Fed officials, including the vice chair-designate, pointed towards a rate hike “skip” in June, giving time for the U.S. central bank to assess the impact of its tightening cycle thus far against still-strong inflation data.
Markets are now pricing in a roughly 32% chance that the Fed will raise rates by 25 basis points at its upcoming meeting, compared with a near 67% chance a day ago, according to the CME FedWatch tool.
Capping the dollar slide, the divided U.S. house on Wednesday passed a bill to suspend the $31.4 trillion debt ceiling, and the focus now turns to how it will fare in the Democratic-led Senate just days before the federal government is expected to run out of money to pay its bills.
“Our view is that … the U.S. government will avoid a default that could potentially derail the U.S. and also the global economy,” Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY), said.
“I think the dollar can gain a little bit more support on a successful vote today.”
