(VOR News) – The euro continued to lose momentum versus the US dollar prior to today’s crucial European Central Bank (ECB) interest rate decision, which is anticipated to be made public.
The EUR/USD pair fell nearly 3% from its September peak of over 1.12, and on Thursday during the Asian session, it settled in the mid-1.18 zone.
Due to market expectations that the European Central Bank will reduce interest rates by an additional 0.25%, the deposit rate will decrease to 3.25%.
If the European Central Bank (ECB) adopts a more hawkish posture than expected, the euro may gain as the markets have already reacted to the expected third rate cut.
Potential results of a rate decrease by hawks
Contrary to expectations, the European Central Bank may not be as dovish as the market believes. A hawkish surprise might cause the euro to spike considerably higher and hike the yields on European government bonds.
Market participants expect a swift rate-cutting trajectory, although the central bank will most likely maintain a gradual pace throughout its easing cycle.
The eurozone’s inflation rate dropped to 1.8% year over year in September, below the target level, according to preliminary statistics from Eurostat. Prior to the ECB’s decision, the final data will be released today.
Since the preliminary estimate and final data typically agree, expectations for a 0.25% rate cut are unlikely to alter unless inflation is revised higher.
At a meeting of the European Parliament’s Committee on Economic and Monetary Affairs, European Central Bank President Christine Lagarde said, “Looking ahead, inflation might temporarily increase in the fourth quarter of this year as previous sharp drops in energy prices drop out of annual rates, but the latest developments strengthen our confidence that inflation will return to target in a timely manner.”
The phrase “We will take that into account in our next monetary policy meeting in October” validates the likelihood of a rate cut in October.
She did, however, add that the European Central Bank will use a “data-dependent approach” and that policy rates will be maintained at a low level for the duration necessary to achieve our objective. We’re not precluding ourselves to a certain rate path.”
According to a study by Carsten Brzeski, Global Head of Macro at ING Research, “a hawkish surprise cannot be entirely ruled out.” He went on, “The decision to cut rates will be far more contentious than the markets currently anticipate.”
The European Central Bank may remain weak in the long run.
Both fundamental and market-driven factors influence a currency’s value. Important variables include European Central Bank inflation, the path of the economy, central bank interest rates, and the stability of political and economic institutions.
The euro appears to be suffering at the moment due to below-target inflation, a slowing economy, unpredictable politics, and the ECB’s easing cycle.
Michael McCarthy, market strategist and chief commercial officer of Moomoo Financial Inc., told Euronews that “the downtrend in growth and inflation data suggests this statement will likely be disregarded,” even though Lagarde will almost certainly re-emphasize a “meeting by meeting” approach.
I expect the euro to slightly rise on the announcement, but it will most likely then resume its medium-term drop and decline from its high over the preceding 2.5 years.
Furthermore, he pointed out that the recent downward pressure on the euro has been made worse by the strength of the US dollar as markets moved away from “the most dovish scenarios in the United States.”
The Federal Reserve (Fed) began its easing cycle in September with a significant 0.5% rate drop, which initially led to a decline in the value of the US dollar.
However, a number of positive economic reports this month, particularly in the labor market, have helped to bolster the US dollar. Money markets are now pricing in a 0.25% rate decrease by the Fed in November, as opposed to the previously anticipated 0.5% rate cut.
The contrasting policy outlooks of the two central banks have been cited as the reason for the euro’s decline against the US dollar.
SOURCE: EN
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