Forex Analysis & Reviews: 02.07.2025 - Strong Euro Increasingly...

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02.07.2025 09:24 AM

Strong Euro Increasingly Concerns ECB Policymakers

The euro has risen significantly this year, and officials at the European Central Bank (ECB) are becoming increasingly concerned that the rapid appreciation of the currency could derail efforts to maintain inflation at the 2% target.

The single currency has gained around 14% against the US dollar this year alone, as confidence in the United States weakens. However, the risk is that the rally pushes the euro to levels that prevent inflation from reaching the target, ultimately undermining competitiveness.

Although a stronger euro reflects the strength of the European economy, it carries potential risks to long-term stability. Exporters, for instance, may face difficulties selling their goods abroad, as those goods become more expensive for foreign buyers. This can lead to lower export revenues and, consequently, slower economic growth. Moreover, a strong euro puts pressure on the ECB, which is striving to keep inflation just below its 2% target. Excessive currency appreciation reduces import costs, which in turn lowers inflationary pressure. If inflation remains subdued, the ECB may continue its policy of low interest rates, which could eventually weaken the euro. Alternatively, rates would have to be kept steady or even raised, which would only increase demand for the euro.

As the currency stands on the verge of its longest winning streak in two decades, the topic took center stage at the ECB's annual retreat in Sintra, Portugal. Vice President Luis de Guindos warned that a rise above $1.20 would be problematic. While much of the euro's rise is due to dollar weakness, fueled by Donald Trump's tariff blitz, which undermines confidence, that doesn't change the situation for the ECB. Initially, this shift was welcomed not only for its anti-inflationary properties but also as an opportunity to enhance the euro's role on the global stage.

"There is some reorientation, particularly by European investors, but also by global players, toward the euro," said ECB Chief Economist Philip Lane. "What we've seen so far looks fine, but of course, we're very curious about what happens next."

Numerous comments about the euro — and the fact that the currency is seen as one of many factors potentially reigniting inflation — suggest that at least some policymakers are feeling less comfortable. And although they are not openly admitting it yet, the strong euro is causing growing concern. Eventually, further strengthening will not only increase inflationary pressure but also pose economic risks to the already struggling export sector.

The euro's surge, which Christine Lagarde has previously described as "controversial but justified", is one of the indicators policymakers will consider when setting interest rates at the upcoming meeting.

Current Technical Outlook for EUR/USD

Currently, buyers need to focus on reclaiming the 1.1800 level. Only then can they target a test of 1.1840. From there, a move to 1.1875 becomes possible, though achieving this without support from large market players will be difficult. The furthest bullish target is the 1.1905 high. In case of a decline, I expect major buyers to take action only near the 1.1750 area. If there is no interest at that level, it would be better to wait for a new low at 1.1686, or consider opening long positions from 1.1640.

Current Technical Outlook for GBP/USD

As for GBP/USD, buyers need to break through the immediate resistance at 1.3750. Only this would allow a move toward 1.3780, though breaking higher may be challenging. The furthest bullish target is 1.3850. In the event of a decline, bears will attempt to regain control of the 1.3715 level. If successful, a breakout below this range would severely damage bullish positions, pushing GBP/USD down to 1.3678, with the potential to reach 1.3640.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.