The EUR/USD pair showed minimal movement during early Asian trading on Tuesday, with the exchange rate hovering near 1.1440.

The Governing Council of the European Central Bank, having raised interest rates in June, convened in Sintra, Portugal from June 29 to July 1, demonstrating a broadly unified and cautious stance.

Despite the passage of three weeks since the emergency rate hike triggered by Middle Eastern energy shocks, a significant drop in energy prices, and positive June inflation and survey data, the indirect effects of the energy shock remain difficult to fully assess.

Framework Guidance: Lagarde's New Communication Paradigm and Policy Flexibility

In her opening remarks at the Sintra Forum, ECB President Christine Lagarde sent a clear signal to the markets: monetary policy decisions have entered a more volatile and less predictable environment, characterized by an increased number and diversity of economic shocks.

Faced with this uncertainty, Lagarde advocated for a communication approach termed "framework guidance" — centered on scenario analysis, which offers less prescriptive forward guidance on future interest rate paths compared to traditional methods.

This shift is not an ad-hoc reaction but aligns with the new monetary policy strategy the ECB introduced in Sintra a year ago. The core logic of this strategy is that when inflation deviates from the 2% target in a limited and transitory manner, the ECB can afford greater flexibility in managing this deviation without causing a significant unanchoring of inflation expectations.

In other words, the current Middle Eastern energy shock represents precisely the type of scenario the new framework was designed to address — allowing the central bank to take responsive action in the initial phase of a shock without committing to a rigid interest rate path until the transmission effects on other components of inflation become clearer.

ECB Chief Economist Philip Lane summarized the committee members' positions during the forum, drawing a clear consensus line: they should not lock themselves into a specific interest rate path until they have a better understanding of how the energy shock affects other inflation components.

Lagarde herself, participating in a panel discussion that included Bank of England Governor Andrew Bailey, Federal Reserve Governor Kevin Warsh, and Bank of Canada Governor Tiff Macklem, defended the June rate hike decision as "entirely reasonable." She simultaneously acknowledged that the risk balance for inflation and growth has improved compared to before, with reduced upside risks to inflation and narrower downside risks to growth.

Disinflation Surprise Does Not Invalidate June Hike

To date, the indirect effects of the energy shock on economic activity and prices in the eurozone remain confined to a limited number of goods and sectors directly exposed. Survey data from the European Commission shows that overall expected price indices remain at historically high levels but have declined for two consecutive months and are below the peak levels seen in the initial stages of the Russia-Ukraine conflict.

June's Harmonised Index of Consumer Prices (HICP) unexpectedly fell to 2.8% year-on-year, down 0.4 percentage points from the previous month. This slowdown was primarily driven by data from France (-0.8 percentage points) and Germany (-0.4 percentage points). Price pressures for non-energy industrial goods were moderate (+0.9% y/y), and food price increases were also mild (+1.6% y/y, the lowest in five years).

In contrast, services inflation — which exhibits some persistence and also eased in June — remained firm above 3%, recorded at 3.2%. The median household one-year inflation expectation has fallen from 4.0% to 3.5%.

Furthermore, the ECB's tracked alternative indicators remain within a range the central bank likely considers acceptable.

This suggests the June rate hike was not a policy error. Returning to the 2% inflation target remains a challenge in the near to medium term. Our baseline forecast shows a more moderate inflation rebound in 2026 (2.7%), but inflation will still not return to target by 2027, remaining at a relatively high level of 2.6%.

Factors supporting this judgment include increased economic activity underpinning core inflation and energy prices remaining relatively elevated.

Structural Forces: Dual Counterweights of Asian Import Deflation and Wage Moderation

Focus on the uncertainty of energy shock transmission should not obscure other inflationary pressures stemming from the conflict, such as rising shipping freight rates and strong demand for AI-related components pushing up import prices for IT, electronics, and optical equipment (+6.8% y/y in April).

However, concurrently, the downward trend in import prices from Asia has accelerated in recent months, particularly in sectors with the most pronounced overcapacity in Asia, such as chemical products.

The impact of Asian import deflation on eurozone inflation dynamics cannot be ignored — the monetary union remains highly import-dependent. Estimates suggest that a 10% drop in Asian import prices would lower overall inflation by approximately 0.3 percentage points — a conclusion highly consistent with a recent ECB research memorandum.

Wage moderation is another factor supporting disinflation, at least in the short term. The ECB's wage tracker currently shows no signs of second-round effects through the end of this year, with underlying wage growth expected to stabilize around 2.5% in the second half of 2026. The ECB will closely monitor this trend through September.

Conclusion: September Hike Remains Baseline but Confidence Wavers

In summary, the overall balance of inflation risks is now slightly tilted to the downside compared to a few weeks ago, but not enough to prompt a change in monetary policy direction. Therefore, the possibility of another rate hike in September still exists, though confidence has weakened compared to a month ago.

In Sintra, the ECB, loyal to its new framework, neither ruled out the possibility of a policy rate pause nor fully embraced the pause option. This posture of "conditional openness" is precisely the core variable the market will need to continuously assess over the next two months.

For traders, the key is to monitor upcoming wage data, Asian import price trends, and the second-order transmission effects of energy prices — together, these will determine whether a September hike is the "final one" or a "stepping stone before a pause."

On the EUR/USD daily chart, the current price is in a phase of low-level consolidation following a medium-term downtrend. The moving average system shows a clear bearish pattern, with the price trading below the MA20, MA50, MA100, and MA200. Medium- and long-term moving averages continue to exert downward pressure, forming a strong resistance zone between 1.1459-1.1650, limiting upside potential. The previous low of 1.1324 forms short-term support, while the prior low of 1.1410 acts as a key pivot point.

The MACD indicator shows the DIFF and DEA lines close to the zero axis, with a histogram value of only 0.0017. The lines show a slight golden cross, with bearish momentum significantly diminished. Weak signals of a short-term bullish correction are present, but an effective bullish trend has not formed, indicating weak rebound momentum.