The European Bank may hint at raising interest rates in July this week, the euro has support but there are downside risks

The European Central Bank is expected to confirm a July rate hike at its policy meeting on Thursday, economists at Barclays said. Barclays now expects the ECB to raise rates by 25 basis points at each meeting from July to December 2022, and again in the first quarter of 2023, taking rates to 0.75%.

Barclays revised its forecast for real GDP growth in the euro zone this week, taking into account slowing global growth, persistently high and prolonged inflation and tighter funding conditions due to rising interest rates. It is reported that Barclays lowered the average growth rate of real GDP in the euro area in 2023 to 0.5% from the previous 1.8%.

Barclays now expects moderate growth in the euro zone economy between the second and third quarters of 2022.


For now at least, the prospect of higher interest rates in the euro zone has proved supportive for the euro, which has recovered from recent months' lows against the pound in May and June.

Meanwhile, the euro has recovered from multi-year lows against the dollar, and the 2022 lows are likely to be a thing of the past if the European Central Bank continues its steady but dovish cycle of rate hikes.

Morgan Stanley currency strategists said the euro could move higher against the dollar. David S. Adams, a strategist at Morgan Stanley in New York, said the upcoming European Central Bank meeting could be a key catalyst in favor of the euro, and he believes now is the time to buy the euro against the dollar. Morgan Stanley expects EUR/USD to trade higher at 1.10. But for EUR/USD to breach 1.10 significantly, the dollar must weaken, and for that to happen, global growth must begin a meaningful recovery.

Meanwhile, FX strategists at Goldman Sachs said they intend to maintain their medium-term optimism on the euro-dollar exchange rate, expecting a jump of 1.10 against the dollar in the coming months. However, the Wall Street bank is reluctant to give a buy recommendation for now, mainly because the Ukraine war remains a tail risk to their expectations for a recovery in the euro.

One downside risk to the euro is that the European Central Bank ends its rate hike cycle sooner than markets currently expect, which would keep euro zone rates well below those in the U.K., U.S. and other developed markets.

That could happen if the euro zone's economic growth falls short of Barclays' current expectations.

"We think the ECB is likely to raise policy rates again in the first quarter of 2023 and then pause, as we expect activity to contract at the start of the year and expect inflation to trend lower by then," said Barclays economist Adagna. Compared to market pricing and analyst consensus, our forecast remains dovish."



EUR/USD daily chart

At 9:00 GMT+8 June 8, EUR/USD was at 1.0694/95.