The EUR/USD pair edged lower during Thursday’s trading session, trading at 1.0925. So far, the losses have been marginal ahead of the ECB’s monetary policy decision.
The likelihood of the ECB cutting interest rates today was extremely low given its stable policy.
Comments from top officials suggest that any rate cuts will be gradual. It seems likely that President Lagarde will maintain a “data-dependent” approach in dealing with policy expectations, which might appear somewhat hawkish given the relatively high inflationary pressures in the services sector. This supports the strength of the euro.
The EUR/USD pair regained most of its losses after dropping to 1.0920 this morning from its four-month high near 1.0950 yesterday. The major currency pair rebounded after the ECB announced its July monetary policy decision.
The ECB kept the main interest rates unchanged as expected, with the main rate and the deposit facility rate remaining at 4.25% and 3.75%, respectively.
In my view, the ECB’s decision to avoid committing to subsequent rate cuts reflects officials’ reluctance to pre-determine a specific path for rate reductions amid concerns over persistent inflation in the services sector, which could reverse the deflationary trend in inflation.
Therefore, I believe that the ECB’s softening of its hawkish stance last month is due to the officials’ strong confidence that inflation and economic risks are well-balanced and that price pressures will eventually return to the desired 2% rate.
Currently, financial markets expect the ECB to cut interest rates twice more this year, possibly in September. ECB President Christine Lagarde stated in her monetary policy statement: “The Governing Council is not pre-committing to a specific rate path.” Lagarde added that overall inflation is expected to be significantly above the desired rate until mid-next year. Regarding interest rate expectations, Lagarde said: “We will continue to follow a data-dependent approach, meeting by meeting, to determine the appropriate level and duration of tightening.”
Thus, in my opinion, the near-term outlook for the EUR/USD pair remains strong with the US dollar vulnerable. The US Dollar Index (DXY) appears weak near its lowest level in over three months at 103.70.
I believe the dollar may see further declines amid strong expectations that the Federal Reserve will start cutting interest rates from the September meeting. Optimistic expectations for rate cuts by the Fed have eased inflationary pressures and cooled labour market conditions. The June Consumer Price Index report showed that both headline and core inflationary pressures slowed faster than expected.
US companies also experienced moderate growth and a slowdown in labour demand from late May to early July. Recent employment data showed that the unemployment rate rose to 4.1%, the highest level since December 2021. The latest inflation figures have boosted Fed officials’ confidence that inflation will return to the 2% target path.
Federal Reserve Governor Christopher Waller expressed confidence in moderating the labour market and inflation. When asked about rate cuts, Waller said: “I think we are approaching the time when a rate cut will be justified”.
Finally, a subsidiary of BlackRock sold $2.5 billion worth of US investment-grade bonds on Wednesday to help finance part of the company’s $3.2 billion acquisition of private market data firm Requin. This caused bond yields to drop, weakening the US dollar against the euro and other currencies in the near and medium term.
