The British pound and the euro slipped in thin trading following the European Central Bank's 25 basis point increase to the deposit rate, a step that market participants had largely priced in.
At 08:31 ET (12:31 GMT), GBP/USD was trading down 0.13% at 1.3352 and EUR/USD had eased 0.08% to 1.1528. Both pairs drifted after the ECB's Governing Council explicitly refused to pre-commit to a path for future rate moves, leaving questions about July policy timing unanswered and depriving the single currency of a clear directional driver.
The ECB raised the deposit rate to 2.25%, citing energy-driven inflation pressures linked to the war in the Middle East. Alongside the hike, the bank revised its 2026 headline inflation projection up to 3.0% and reduced its growth forecast for the year to 0.8%.
Money markets have fully absorbed the 25bp increase and are pricing another 25bp of tightening by September. Given that backdrop, the euro will likely need the ECB to signal consecutive hikes - effectively opening the door to back-to-back moves - if it is to mount a sustained advance from current levels.
Technical short-term resistance for EUR/USD sits at 1.1565/75, with failure to clear that zone keeping 1.1500 as the next key support. That floor becomes especially relevant should the US producer price index due later in the session print hotter than expected.
Broad dollar strength remains the dominant theme. The DXY index is holding near 100, and the upcoming PPI release is viewed as the next obvious catalyst that could nudge it toward the 100.25/35 band. The dollar's resilience is the main driver behind sterling's softness rather than any immediate pound-specific deterioration.
Short-dated euro swap rates remain elevated and appear decoupled from crude oil moves, a condition that underscores how entrenched the central bank tightening narrative is irrespective of individual data releases.
The Bank of England remains on the sidelines with no new domestic catalyst in view, leaving cable exposed because of its pro-risk character. If macro data later in the session triggers risk-off flows in equities, sterling could come under further pressure. ING's 1.3300 target for the pound this week remains within view, with a further extension down to 1.3200 possible if dollar momentum reasserts.
Summary
- The ECB raised the deposit rate by 25bp to 2.25% but did not commit to a future rate path, leaving the euro without a fresh bullish catalyst.
- GBP/USD and EUR/USD slipped as dollar demand persisted, with GBP/USD near 1.3352 and EUR/USD near 1.1528 at 08:31 ET (12:31 GMT).
- Markets have priced another 25bp of ECB tightening by September; DXY remains near 100 with US PPI seen as the next market mover.
Key points
- Central bank policy - The ECB's 25bp hike and refusal to pre-commit on a rate path weigh on the euro; elevated short-term EUR swap rates underline the tightening narrative.
- FX markets and risk assets - Dollar resilience is pressuring both the euro and sterling, with sterling particularly exposed given the Bank of England's inactivity and cable's sensitivity to risk flows.
- Macro datapoints - US PPI and recent US May core CPI (0.2% MoM) are market focal points that influence Fed expectations and dollar direction.
Risks and uncertainties
- US data risk - A hotter-than-expected PPI print could boost the dollar further, pressuring EUR/USD and GBP/USD, and affecting FX-sensitive sectors.
- ECB forward guidance - Lack of commitment on a rate path leaves the euro vulnerable unless the ECB signals back-to-back hikes; uncertainty impacts bond and swap markets.
- Risk sentiment - An equity sell-off driven by macro shocks could amplify sterling's decline, given cable's pro-risk profile and the Bank of England's sidelined status.
Markets will be watching upcoming US PPI data and central bank commentary closely for clues on the next directional moves in FX and rates.