EUR/USD on Defensive as US Dollar Bounces Back

In early European trading, the EUR/USD pair is experiencing a defensive stance below the 1.0950 level this Monday. The pair is being weighed down by a rebound in the US Dollar and growing risk aversion in the market. Investors are carefully analyzing US-Sino headlines and grappling with concerns over Chinese economic growth. Additionally, market participants are closely watching for any statements from the European Central Bank (ECB). It's worth noting that US markets are closed today due to the observance of Juneteenth.

EUR/USD had extended its rally last week, reaching its highest level since May 11 at 1.0962 before experiencing a minor retreat. The Euro has been outperforming its peers thanks to hawkish comments from the ECB. However, from a technical perspective, there are signs of overbought conditions in the near term.

In June, as anticipated, the ECB increased its key rates by 25 basis points (bps). The policy statement revealed that Eurosystem staff had revised their core inflation projections for 2023 and 2024 upward. In the post-meeting news conference, ECB President Christine Lagarde all but confirmed another 25 bps rate hike at the next meeting.

Lagarde stated, "Barring a significant change to our current assumptions, it is highly likely that we will continue to raise rates in July, which probably doesn't come as a surprise." She also downplayed the softer HICP readings from the Euro Area and reiterated that inflation is projected to remain elevated for an extended period.

Lagarde's hawkish tone, coupled with the upward revisions to inflation forecasts, fueled the rally of EUR/USD on Thursday.

On the other hand, the US Dollar remained under persistent selling pressure following disappointing Initial Jobless Claims data, which came in at 262,000 for the week ending in June.

Looking ahead, the US economic calendar features the University of Michigan's Consumer Sentiment Survey for June before the weekend. Additionally, with the Federal Reserve's blackout period ending on Friday, Fed officials are likely to comment on the policy outlook. Market expectations, as reflected in the CME Group FedWatch Tool, indicate a 25 bps rate increase by the Fed in July. Should policymakers attempt to guide markets towards anticipating a rate hike at the upcoming policy meeting, the US Dollar could rebound, causing EUR/USD to retreat.

Nevertheless, ECB policymakers appear committed to reassuring investors about their intention to maintain a tight monetary policy stance, which helps the Euro hold its ground. ECB policymaker and Bundesbank Chief Joachim Nagel stated that inflation risks still lean toward the upside, and Governing Council member Gediminas Šimkus noted that he did not anticipate an early rate cut next year.