Although ECB President Christine Lagarde said after the last meeting that she was not worried about the current euro exchange rate and did not agree that the recent appreciation constituted a new inflationary threat, other officials at the regulator have suggested the situation is not so straightforward.

"The European Central Bank is closely watching trends in foreign-exchange markets and is ready to respond to any possible impact on inflation," Governing Council member Francois Villeroy de Galhau said.

Villeroy said the euro's recent rise against the dollar to levels unseen since 2021 is in the spotlight because it could put downward pressure on prices in Europe just as inflation approaches the 2% target. Many economists likewise argue that such a development could complicate the task of achieving price stability, since cheaper imported goods resulting from a strong euro could partly offset efforts to curb inflation.

Thus, the ECB faces a dilemma: on the one hand a strong euro helps restrain inflation; on the other hand it can slow economic growth by making European goods less competitive on world markets. ECB policy in the near term will likely seek a balance between these opposite forces while keeping the focus on fulfilling the price stability mandate.

While Villeroy emphasised that the rally reflects dollar weakness amid US policy uncertainty and still keeps the single currency around long-run averages, he said officials are on heightened alert. The ECB does not have a foreign exchange rate target, but the exchange rate is obviously important for our inflation and growth outlook," the French official told lawmakers in Paris. "Our Governing Council will remain very vigilant on trends — and I insist more on trends than the level," he added.

Recall that Villeroy once again took a softer stance after the recent meeting than some of his ECB colleagues, reiterating that the risks of failing to reach the inflation target are larger than the risks of overshooting it. He repeated his call for policymakers to remain "pragmatic" and "flexible" in setting interest rates, which have stood at 2% since mid-2025. Villeroy said that even if monetary policy is well thought out it could not and should not be immutable, and he warned that a sudden surge in cheap Chinese imports could place downward pressure on prices.

A technical outlook for EUR/USD suggests that buyers should consider reclaiming 1.1800. That would open the way to test 1.1830. From there, a move to 1.1860 is possible, although advancing beyond that without support from major players would be difficult. The extended target is the high at 1.1890. On a decline, meaningful buying interest is likely around 1.1770. If buyers do not appear there, it would be prudent to wait for a new low at 1.1740 or to open long positions from 1.1710.

As for GBP/USD, buyers need to capture the nearest resistance at 1.3500. Only that will allow them to target 1.3530, above which a breakout would be challenging. The extended target is the area around 1.3560. If the pair falls, bears will try to seize control at 1.3465. If they succeed, a break of that range would deal a serious blow to bullish positions and could push GBP/USD down to 1.3430 with scope to extend to 1.3400.