The speeches by the Federal Reserve and the European Central Bank heads highlighted the divergence in interest rate policy outlook, which could have a bullish impact on EUR/USD.

The EUR/USD pair has been gradually rising since last Friday, reaching a high of 1.0830 at the beginning of this trading week (May 22), following speeches by the heads of the Federal Reserve and the European Central Bank that highlighted the divergence in interest rate policy outlook. Federal Reserve Chair Jerome Powell signaled caution amid tightening credit conditions. On the other hand, ECB President Christine Lagarde expressed a hawkish stance once again.

eurusdEUR/USD Daily chart via TradingView

Last week, all European Central Bank (ECB) members reiterated their hawkish stance, contrary to the slightly dovish outcome of the ECB meeting earlier this month. ECB President Christine Lagarde even warned that Europe should "prepare" for "sustained high-interest rates" to achieve its inflation target.

In an interview on Buitenhof TV, Lagarde stated that significant measures had been taken to control inflation and align it with the ECB's target. However, the inflation outlook for the Eurozone remains too high and requires tighter monetary policy.

"We're not done, we're not going to stop the (interest rate hiking) cycle based on the information I have today," Lagarde emphasized.

Unfortunately, the former IMF director refused to provide clearer guidance on her future policy plans. She mentioned that many unforeseen factors could disrupt the economic outlook in the future, making it difficult to provide specific figures.

When asked about the US debt ceiling negotiations, Lagarde stated that the world is threatened with a catastrophe if the United States were to experience a default. However, she expressed confidence that US leaders would strive to avoid the worst-case scenario.

Lagarde said, "I believe in the common sense and the nationhood consciousness of the leaders to reach an agreement — if not, we will be heading toward extremely, extremely negative developments."

Sean Callow, a strategist at Westpac, also believes that an agreement on the US debt ceiling will be reached. At the same time, he believes that the policy outlook for the Federal Reserve will weigh on the US dollar against its major counterparts. He predicts that the US Dollar Index (DXY) could fall towards 101.00 in the coming days or weeks, mainly due to the contrasting stances between the heads of the Federal Reserve and the ECB.

"Powell's preference to pause rate hikes in June should outweigh the hawkish views of regional Fed presidents, making DXY a 'sell on rallies,'" said Callow.