EUR/USD: 2 complex monetary equations

The relatively accurate barometer of risk appetite in the markets, the EUR/USD, reacted positively on Thursday following the ceasefire agreement between Israel and Lebanon, which is conditional on a "complete cessation" of attacks by Hezbollah, a paramilitary organization designated as a terrorist group by many countries and supported by Iran.

"This news helps remove a major obstacle in the negotiations between the United States and Iran that had been preventing an agreement from being reached," explains Deutsche Bank.

This provided some relative and temporary relief, a sentiment that does not change the underlying situation: the resurgence of inflationary fears due to the direct and indirect impact of crude oil prices, which remain chronically high, hovering near $95 a barrel for Brent crude, the North Sea benchmark.

"At its meeting on June 11, the ECB is very likely to raise its key interest rates by 25 basis points, in line with its recent restrictive rhetoric. Beyond that, the outlook for monetary policy is darkening, as the Governing Council must find a balance between persistently high inflation and slowing economic activity," says Martin Wolburg, senior economist at Generali Investments.

It is worth noting that Europe is structurally much more dependent on fossil fuel imports than the United States, which remains the world's leading oil producer by volume.

"Inflation is spreading, inflation expectations have risen slightly, and falling real interest rates support maintaining a restrictive stance. At the same time, growth is slowing, credit conditions have tightened, and signs of widespread second-round wage effects remain limited. Moreover, monetary policy cannot address the root causes of a supply-side shock. The June rate hike would therefore primarily serve to preserve the ECB's credibility in fighting inflation and to anchor expectations. But with hopes for a peace agreement in the Iran conflict fading again and stagflation risks remaining high, President Lagarde will likely want to leave the door open for further tightening if necessary."

Published earlier this week, the first inflation estimates for the Eurozone in May slightly exceeded expectations, reaching 2.4% year-on-year, excluding volatile items (food, energy, alcohol, and tobacco).

In the United States, the situation is different but nonetheless complex, as the country is far less dependent on fossil fuel imports. The resilience of the world's largest economy is also greater.

"Donald Trump seems relatively indifferent to the political cost of his strategy, even as he reaches record levels of unpopularity in several recent polls and the midterm elections are already looming. However, while the American economy remains generally resilient, the first consequences of the conflict are beginning to appear in the statistics," notes Thomas Giudici, Head of Fixed Income at Auris Gestion.

"In addition to downwardly revised growth figures for the first quarter (1.6% versus the initial estimate of 2%), the inflationary shock linked to rising energy prices continues to erode household purchasing power. Personal income remained stable in April, after a 0.5% increase in March (boosted by tax refunds) and against a consensus forecast of a 0.4% rise, forcing American households to draw more heavily on their savings to support their consumption. The household savings rate has also fallen to its lowest level since 2022."

Right now, the EUR/USD is trading at $1.1640.

KEY TECHNICAL ELEMENTS
From a technical perspective, the euro/dollar pair is now encountering a pivotal zone. After recovering much of its decline related to the acute phase of the conflict, it is trading near the upper limit of its trading range. This setup reflects a compression of volatility and marked hesitation among market participants, who are currently unable to trigger a sustained impulse. In the absence of a clear catalyst - whether macroeconomic, monetary, or geopolitical - the pair remains contained below this major resistance ($1.1825), in a wait-and-see phase that could lead to a more directional move once this equilibrium is broken.

The hanging man candlestick pattern of 10 May sent a negative technical signal, which resulted in a downward acceleration in the form of a break below the 200-day moving average (in brown).