The euro recovered from a two-month low Thursday after European Central Bank (ECB) President Christine Lagarde said inflation remained too high and further policy tightening was necessary.

Data showed on Thursday that inflation in the 20 nations sharing the euro eased to 6.1% in May from 7.0% in April, below expectations for 6.3% in a Reuters poll of economists.

But the current level is still more than three times the ECB’s 2% inflation target.

“Today, inflation is too high and it is set to remain so for too long,” Lagarde said in a speech.

“We have made clear that we still have ground to cover to bring interest rates to sufficiently restrictive levels,” she added.

The ECB has raised base rates by a combined 375 basis points (bps) to 3.25% over the past year to combat runaway prices.

Money markets are pricing in an 85% chance of a 25 bps hike when the ECB meets on June 15. Another 25 bps hike is expected in July, according to Refinitiv.

“The euro is taking a bit of a ride higher,” said John Velis, FX and macro strategist at BNY Mellon (NYSE:BK). “There’s a sort of narrowing interest rate differential … when the ECB is expected to hike one or two more times and the [U.S. Federal Reserve] is more questionable about that.”

The euro was last up 0.36% to $1.07265, off a two-month low of $1.0635 touched on Wednesday after some European countries released national inflation data showing signs price pressures have eased.

FED TO PAUSE

The dollar drifted from a two-month high as investors trimmed bets the Federal Reserve will raise interest rates this month.

The dollar index, which measures the currency against a basket of six peers, fell 0.278% at 103.840, off a two-month high of 104.7 touched on Wednesday.

Fed officials pointed towards a rate hike “skip” in June, giving time for the U.S. central bank to assess the impact of its tightening cycle thus far against still-strong inflation data.

Markets are now pricing in a roughly 32% chance that the Fed will raise rates by 25 basis points at its upcoming meeting, compared with a near 67% chance a day ago, according to the CME FedWatch tool.

Limiting the dollar slide, the divided U.S. House of Representatives on Wednesday passed a bill to suspend the debt ceiling, and the focus now turns to how it will fare in the Democratic-led Senate.

“Our view is that … the U.S. government will avoid a default that could potentially derail the U.S. and also the global economy,” Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY), said.

“I think the dollar can gain a little bit more support on a successful vote today.”

Elsewhere, sterling was last trading at $1.25125, up 0.57% on the day, while the Australian dollar rose 0.53% versus the greenback at $0.654.