The economic highlight of the week for forex markets is likely Europe’s equivalent of the Fed’s Jackson Hole Symposium. The ongoing three-day meeting of the world’s major central bank heads in Sintra, Portugal could give markets important insight into the future of monetary policy. The Euro will stay in focus as the ECB hosts the Forum, and on Tuesday, flash CPI data for June will be released.
Markets are watching closely for guidance given uncertainty around future inflation. Up until recently, traders priced in higher inflation that would force central banks to raise rates through the rest of the year. That inflation was expected to come from higher energy prices. But crude has now returned to pre-war levels, which reduces its medium- to long-term inflation pressure. The key question is how central bank policy will respond.
ECB Justifying Its Moves
The ECB was the first major central bank to raise rates during inflationary pressure. Speaking at the opening of the Forum in Sintra, President Christine Lagarde defended the decision. She said the hike was not “insurance” against rising inflation and confirmed the bank will remain data-dependent.
Her comments echoed recent remarks from other ECB officials who describe a “vigilant” and “cautious” stance. Lagarde also signalled a shift in guidance, with the ECB becoming less “forward-looking.” This aligns with recent comments from Fed Chair Kevin Warsh at the FOMC meeting a few weeks ago. Central banks want to keep flexibility on hikes, cuts, or holds.
The Rebound in the Euro
EURUSD has risen over the last week, recovering from recent lows after the Fed rate decision. The dollar remains stronger on expectations of future rate hikes, but the Euro has gained slightly more in recent sessions.
Markets are cautious about the Euro as the Eurozone economy remains weak and the ECB may still tighten policy. A drop in inflation could actually support the Euro in the short term. But higher inflation would likely weigh more on growth and pressure the currency.
What the Market is Looking For
Eurozone flash June CPI is due Wednesday and is expected to ease slightly to 3.1% from 3.2%. Core inflation is expected to stay unchanged at 2.6%, still above the ECB’s 2.0% target. French data already came in slightly softer than expected.
After the release, attention shifts back to Sintra. Fed Chair Warsh and BOE Governor Andrew Bailey are expected to speak. Warsh will be closely watched in his first major appearance since the rate decision. Lagarde is also expected to speak again and may give further policy guidance.
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