01.05.202608:57 Forex Analysis & Reviews: European Central Bank and Bank of England Leaning Towards Interest Rate Hikes

The euro and British pound surged sharply against the US dollar yesterday following central bank meetings. It has become clear that the European Central Bank (ECB) and the Bank of England (BoE) are seriously leaning towards raising interest rates, which may occur as early as June. This action is intended to prevent renewed inflation stemming from the conflict in the Middle East.

After yesterday's statements by the heads of the ECB and BoE, the European and British currencies showed strong gains in the currency market, leaving the US dollar behind. The decisions made during the meetings, along with the subsequent comments, triggered a wave of reassessment of risks and expectations regarding future monetary policy. The indication of possible interest rate increases as early as June was a key factor that prompted this rally.

From the central banks' individual statements, a common position emerges: the Middle East conflict, which is putting pressure on commodity markets, particularly oil, is pushing central banks towards more decisive actions. The risk of renewed inflationary pressure associated with rising energy prices is becoming increasingly palpable. In this regard, considering the possibility of raising interest rates serves as a preventive measure aimed at stabilizing price dynamics and maintaining macroeconomic stability in the eurozone and the United Kingdom.

Although both central banks bought themselves some time by leaving interest rates unchanged yesterday while awaiting clarity on the war in Iran, they indicated they would consider raising rates over the summer.

ECB President Christine Lagarde suggested that eurozone representatives would consider raising interest rates at their June meeting, following extensive discussions today on the feasibility of such a step. "The past period will be a suitable time to assess the state of the economy to make an informed decision based on validated and revised information," she said.

As for the BoE, its most pessimistic scenario, based on the forecast that oil prices will reach $130 per barrel and remain high, suggests a peak inflation of 6.2% by early 2027, and according to modeling based on monetary policy rules, interest rates may be raised up to seven times. Even the softer scenario currently preferred by BoE Governor Andrew Bailey anticipates two rate hikes, sharply contrasting with February when officials actively discussed the prospect of cutting interest rates.

In the current technical picture for EUR/USD, buyers need to focus on reclaiming the 1.1735 level. Only then can they target a test at 1.1750. From there, it is possible to ascend to 1.1775, but this will be quite challenging without support from major players. The farthest objective will be the high of 1.1790. If the trading instrument drops only to around 1.1710, I expect serious action from major buyers. If there are none, it would be wise to wait for an update of the low at 1.1685 or open long positions from 1.1655.

Regarding the current technical picture for GBP/USD, pound buyers need to reclaim the nearest resistance at 1.3620. Only this will allow them to target 1.3650, above which it will be quite difficult to break through. The farthest target will be the area of 1.3680. If the pair falls, bears will try to take control of 1.3570. If they succeed, breaking the range will deal a serious blow to the bulls' positions and push GBP/USD down to a low of 1.3550, with the prospect of a move to 1.3525.