EUR/USD Remains Below 1.1100, Challenged by Growing Chances of ECB Rate Cut

VaselineSeptember 9, 2024

0 2 minutes read

EUR/USD Remains Below 1.1100, Challenged by Growing Chances of ECB Rate Cut

EUR/USD could face challenges as recent Eurozone inflation data strengthened the likelihood of an ECB rate cut.
US economic data on Friday raised uncertainty about the likelihood of an aggressive Fed rate cut in September.
Chicago Fed President Goolsbee said Fed officials are beginning to align with the broader market sentiment of a rate hike.

EUR/USD is trying to recoup losses from the previous session, trading near 1.1090 during the Asian session on Monday. However, EUR/USD’s gains could be capped as recent eurozone inflation data bolstered expectations for an interest rate cut by the European Central Bank (ECB) at its next policy meeting on Thursday.

With headline inflation approaching 2% and long-term inflation forecasts holding steady around the same level, the ECB has ample justification to further ease its monetary policy stance. In addition, last week’s mixed Eurozone Gross Domestic Product (GDP) data reinforced expectations of a potential interest rate cut by the ECB.

On Friday, US economic data raised uncertainty about the likelihood of an aggressive interest rate cut by the Federal Reserve (Fed) at its September meeting. The US Bureau of Labor Statistics (BLS) reported that non-farm payrolls (NFP) added 142,000 jobs in August, below the forecast of 160,000, but an improvement from July’s downwardly revised figure of 89,000. Meanwhile, the unemployment rate fell to 4.2 percent, as expected, down from 4.3 percent the previous month.

According to the CME FedWatch tool, markets fully anticipate a rate cut of at least 25 basis points (bps) by the Federal Reserve at its September meeting. The probability of a 50 bps rate cut fell slightly to 29.0%, down from 30.0% a week ago.

Federal Reserve (Fed) Bank of Chicago President Austan Goolsbee noted on Friday that Fed officials are beginning to align with broader market sentiment that a policy rate adjustment by the US central bank is imminent, according to CNBC. FXStreet’s FedTracker, which uses a custom AI model to rate Fed officials’ speeches on a scale of 0 to 10, rated Goolsbee’s comments as upbeat, assigning them a score of 3.2.

ECB FAQs

The European Central Bank (ECB) in Frankfurt, Germany is the reserve bank for the euro area. The ECB sets interest rates and manages monetary policy for the region. The ECB’s main mandate is to maintain price stability, which means keeping inflation at around 2%. Its main tool to achieve this is by raising or lowering interest rates. Relatively high interest rates will usually lead to a stronger euro and vice versa. The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are taken by the heads of national banks in the euro area and six permanent members, including ECB President Christine Lagarde.

In extreme situations, the European Central Bank can implement a policy tool called Quantitative Easing. QE is the process by which the ECB prints euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually leads to a weaker euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis of 2009-11, in 2015 when inflation remained stubbornly low, and during the covid pandemic.

Quantitative tightening (QT) is the inverse of QE. It is undertaken after QE when an economic recovery is underway and inflation begins to rise. While in QE the European Central Bank (ECB) buys government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds and stops reinvesting the maturing principal in the bonds it already owns . It is usually positive (or bullish) for the euro.

VaselineSeptember 9, 2024

0 2 minutes read

ECB FAQs

Vaseline

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