The European currency remains resilient in global markets despite heightened geopolitical uncertainty. A key driver for the euro has been the acceleration of inflation in the eurozone: in May, consumer prices rose by 3.2% year-on-year compared to 3.0% a month earlier, while core inflation accelerated to 2.5%.
Following the release of the data, EUR/USD held above the 1.1600 level, as investors increased expectations of a more hawkish stance from the European Central Bank.
Markets have largely priced in an ECB rate hike
Market participants are now focused on the ECB meeting scheduled for June 11. In recent weeks, central bank officials have repeatedly pointed to rising inflation risks, primarily linked to high energy prices. The market assigns a very high probability to a 25 basis point rate hike. Additional support for tighter policy comes from persistently elevated inflation expectations among European households, which remain around 4% for the year ahead.
Inflation outpacing economic growth
The ECB faces a complicated situation, as inflation is accelerating against a backdrop of weak economic growth. Analysts are increasingly discussing the risk of a stagflation scenario in the eurozone: pressure from the energy market remains, while business activity and overall economic growth stay subdued. The ECB’s latest projections already point to higher inflation in 2026 compared to previous estimates.
What matters for the euro now
Ahead of the ECB meeting, the euro’s potential will largely depend on the central bank’s rhetoric. The rate hike itself is mostly priced in, so the key factor will be signals regarding further policy steps in the second half of the year. If the ECB confirms its commitment to continue fighting inflation, the euro may receive additional support. However, weak economic growth and strong demand for the US dollar as a safe-haven asset continue to limit the upside potential of the European currency.
Near-term outlook
EUR/USD continues to hold above 1.1600, indicating ongoing potential for a breakout above resistance at 1.1660 and a move toward the 1.1680–1.1700 range. Nevertheless, as previously noted in the article EUR/USD holds above 1.1600 amid hawkish ECB, the pair remains in a corrective phase, and it is still too early to speak about its completion.
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