The EUR/USD currency pair recovered to near 1.1720 during the early Asian session on Thursday, as the Euro gained ground against the US Dollar. This move was driven by hawkish signals from European Central Bank (ECB) officials, who indicated a rising probability of further rate hikes. Specifically, ECB policymaker Joachim Nagel stated that the likelihood of the central bank needing to raise borrowing costs due to the Iran war is increasing. In contrast, ECB Chief Economist Philip Lane emphasized the need for careful analysis of the impact on growth and inflation before making any policy decisions, describing the process as a judgment call [1].
Market expectations for an ECB rate hike have strengthened, with a Reuters poll showing that about 85% of economists now anticipate a 25 basis point increase in the deposit rate to 2.25% in June. This is a notable rise from just over half of economists who expected such a move before the ECB's April meeting [1].
On the US side, the Bureau of Labor Statistics reported the hottest wholesale inflation reading since late 2022. The US Producer Price Index (PPI) surged by 6.0% year-over-year in April, up from 4.3% in March and exceeding the market consensus of 4.9%. On a monthly basis, PPI inflation climbed to 1.4% in April from 0.7% in March, significantly higher than the anticipated 0.5%. This hotter-than-expected US PPI data could help limit the US Dollar's losses in the near term, despite the Euro's current strength [1].
Traders are also awaiting the US Retail Sales report for April, which is due later on Thursday and could provide further direction for the EUR/USD pair [1].
CONCLUSION
The Euro's recovery above 1.1700 is being supported by increased expectations of an ECB rate hike, even as strong US inflation data offers some support to the Dollar. Market participants are closely watching upcoming data releases and central bank signals for further cues on the direction of the EUR/USD pair.