EUR/USD Slumps Towards 1.0500 as Inflation Fears Worsen

The EUR/USD pair recorded a predominantly bearish week to close its weekly candle near the 1.0500 inflation fears triggered risk flight. Most macroeconomic data highlighted worsening price increases and economic growth, prompting investors to flock to safer assets.

The European Central Bank (ECB) played the most critical role in the dollar’s bullish performance last week after keeping rates unchanged for June as expected. Also, the ECB confirmed that it would increase its lending rate in July, its first hawkish rate change in a decade. However, half of the proposed 50 basis points rate hike has already been priced-in.

The ECB Governing Council also revealed that the bank would announce another rate hike in September, with more hikes to follow. However, this hawkish stance bordered on the medium-term inflation outlook.

The ECB revised its annual inflation projection from 5.1% in March to 6.8%. The bank also forecasted yearly inflation of 3.5% in 2023 and 2.1% in 2024. Furthermore, policymakers cut their annual growth expectations from 3.7% to 2.8% and projected a growth rate of 2.1% in 2024. However, the bank revised its growth estimates for 2024 upwards, from 1.6% to 2.1%.

Governments and Central Banks Lack Ability to Tackle Inflation

The ECB’s inflation estimates have been adjusted quarter after quarter, highlighting policymakers’ incapability to contain rising inflation.

Experts forecast that economic metrics are only going to worsen in the future. Many argue that neither inflation nor growth will enter positive mobility anytime soon, adding that Central Banks’ future rate decisions have already been priced-in. Also, governments continue to fail at launching a coordinated effort and taking ineffective actions to tame price pressures.