25.06.202610:51 Forex Analysis & Reviews: ECB hawks intensify calls for further tightening

The euro has regained some ground against the dollar as the hawkish chorus at the ECB grows louder, and yesterday it gained a new member in the form of Croatia's central bank governor, Ante Zigman.

In his first public remarks since taking office, he set out the regulator's priority clearly. The main task remains containing inflation. However, he immediately noted that this task is somewhat eased as oil prices fall.

Zigman's logic links geopolitics directly to inflation. He said that the opening of the Strait of Hormuz led to a fall in oil prices, which will undoubtedly have a positive effect on price dynamics. That is the causal chain we have discussed many times: cheap oil reduces inflationary pressure and therefore makes central bankers' work easier. Brent has already fallen below pre-war $72 this week, fully erasing the wartime gain, and Zigman's comments yesterday indicate that the ECB already views that decline as a factor working toward the return of inflation to target.

Nevertheless, a clear fall in oil prices does not mean that the ECB is ready to stop. On the contrary, the rhetoric of other Governing Council members remains firm. Chief economist Philip Lane recently said that inflation will remain above the 2% goal for quite some time. Vice President Boris Vujcic, whom Zigman replaced in the Croatian post, has said that both headline and core price pressure will remain higher for an extended period. Isabel Schnabel, in an interview with Die Zeit, explicitly pointed to the need for further rate increases to bring inflation back to target.

The picture is forming in which, even against the backdrop of cheaper oil, the majority at the ECB is inclined to continue tightening.

Zigman himself made it plain which camp he belongs to. Asked to choose between hawks and doves, he answered by reference to personal experience. As an economist who grew up during hyperinflation in Croatia, he learned that one must be cautious with inflation and act in a timely way to protect the most vulnerable. That is a strong signal. The new Governing Council member arrives with a deeply rooted aversion to inflation, bolstering the regulator's hawkish wing just ahead of discussions of a second rate increase.

For the euro, this is potential support, but the real impact will depend on how quickly the fall in oil prices begins to show up in inflation data. If disinflation from cheaper energy appears in upcoming releases, the doves' arguments will strengthen, and a July rate increase will be in doubt.

The current technical picture for EUR/USD suggests that buyers now need to take the 1.1370 level. Only that will allow them to target a test of 1.1415. From there it would be possible to reach 1.1450, but doing so without support from large players would be difficult. On the downside, I expect serious buying activity only around 1.1330. If no buyers are present there, it would be preferable to wait for a new low at 1.1270 or to open long positions from 1.1230.

As for GBP/USD, buyers of the pound sterling need to take the nearest resistance at 1.3185. Only that will allow a move toward 1.3230, above which further progress will be difficult. The next target is the 1.3270 area. On a fall, bears will attempt to seize control of 1.3150. If they succeed, a break of the range would inflict a serious blow to bulls and push GBP/USD toward a low of 1.3120 with the prospect of extending to 1.3100.