18.06.202512:01 Forex Analysis & Reviews: The ECB Must Consider the Strong Euro and High Oil Prices

According to Governing Council member Francois Villeroy de Galhau, the European Central Bank needs to assess fluctuations in oil prices and the euro when setting borrowing costs.

Although the ECB does not target a specific exchange rate, the single currency has shown surprising strength against the dollar since President Donald Trump initiated his tariff campaign. Meanwhile, energy prices have surged following Israel's attacks on Iran.

These seemingly unrelated events are, in fact, intertwined in the complex web of the global economy, where each action triggers a chain reaction. The euro's appreciation—possibly driven by a reassessment of risks associated with U.S. trade policy—makes European goods relatively more expensive for American consumers, potentially reducing European exports. On the other hand, it could push European companies to improve efficiency and innovate to remain competitive.

The rise in energy prices, fueled by geopolitical instability in the Middle East, has a direct impact on global inflation. Higher oil costs affect transportation, manufacturing, and many other sectors, increasing pressure on central banks to tighten monetary policy. The effects of these factors on the global economy are multifaceted. On one side, a strong euro can support European imports and strengthen domestic demand. On the other hand, high energy prices may undermine consumer spending and slow economic growth.

"As for oil, we are seeing changes—we saw them between yesterday and today, and we will see them tomorrow," said Villeroy. "The euro exchange rate acts against inflation. We need to incorporate this exchange rate analysis into our monetary policy decision."

ECB officials are increasingly signaling that they are comfortable keeping interest rates at the current level of 2% for now. Most believe that inflation is largely under control as they await the outcome of trade negotiations between Europe and the U.S. The ECB is expected to hold off on taking any action at its July meeting. Some policymakers have even suggested that the easing cycle may be over.

EUR/USD Technical Outlook

At present, EUR/USD buyers need to break above the 1.1540 level. Only then can the pair target a test of 1.1580. From there, it could reach 1.1630, but doing so without support from large players may be difficult. The most distant target is the 1.1700 high. In case of a decline, I expect significant buyer interest only around 1.1500. If there is no support at that level, it would be preferable to wait for a retest of the 1.1455 low or to enter long positions from around 1.1405.

GBP/USD Technical Outlook

Pound buyers need to overcome the nearest resistance at 1.3475. Only then will a move toward 1.3505 be possible, although breaking above that level will be quite difficult. The most distant target is the 1.3533 level. If the pair declines, bears will attempt to regain control at 1.3430. If successful, a breakout of that range would deal a serious blow to bullish positions and push GBP/USD toward the 1.3390 low, with the potential to reach 1.3343.