EUR/USD remains on the back foot ahead of the ECB policy meeting
- EUR/USD remains below 1.0900 as the ECB is expected to cut its lending rates by 25 bps on Thursday.
- The growing speculation of Donald Trump’s victory in the US presidential election has clouded the Eurozone’s economic outlook.
- The Fed’s Waller suggested a gradual reduction in interest rates next year.
EUR/USD falls near 1.0880 in Wednesday’s North American session. Major currencies weakened as the Euro (EUR) underperformed on expectations that the European Central Bank (ECB) will cut interest rates again on Thursday.
The ECB is widely expected to cut its Deposit Rate by 25 basis points (bps) to 3.25%. This will be the second straight interest rate cut by the ECB in a row. With strong confidence that the ECB will cut interest rates tomorrow, investors will pay close attention to the monetary policy statement and ECB President Christine Lagarde’s press conference for updates on the interest rate outlook.
The comments from Lagarde are expected to be dramatic as inflationary pressures in the Eurozone appear to be under control, and fears of a recession have increased significantly. According to preliminary estimates, the Eurozone Harmonized Index of Consumer Prices (HICP) fell to 1.8% in September. Meanwhile, the second estimate of the monthly Consumer Price Index (CPI) (EU Norm) in France and Italy showed that price pressures were slower than earlier expectations.
Growing speculation about former US President Donald Trump winning the United States (US) presidential election has also raised concerns about the European Union’s (EU) foreign policy. Trump’s victory is expected to lead to an increase in tariffs on imports from the United States, which could restrict exports from the old continent and cause further weakness in economic growth.
Daily market movers: EUR/USD trades sideways as US Dollar consolidates
- EUR/USD has been under pressure due to the strong performance of the US Dollar over the past few weeks. The US Dollar Index (DXY), which tracks the value of the Greenback against six major currencies, rose to 103.40. The greenback is strengthening as traders see the US Federal Reserve (Fed) gradually reducing interest rates for the rest of the year.
- The Fed is expected to switch to a ‘moderate’ rate of policy easing from ‘aggressive’ as fears of a recession eased after Nonfarm Payrolls (NFP) and US Services Purchasing Managers Index (PMI) grew strongly , with price pressures mounting. earlier than expected in September.
- According to the CME FedWatch tool, traders are confident that the central bank will reduce interest rates by 25 bps in November and December.
- In contrast, Fed Governor Christopher Waller warned against cutting interest rates this week in a speech at Stanford University, saying “Regardless of what happens in the near term, my bottom line is that we still want to cut policy rate gradually next year,” Reuters reported. . When asked about the current state of the job market, Waller said, “The labor market remains healthy, as is the demand for workers.”
- Going forward, the next trigger for the US Dollar will be the monthly Retail Sales data for September, which will be published on Thursday. Economists expected Retail Sales data to increase 0.3% after rising 0.1% in August.
Technical Analysis: EUR/USD sees sharp decline below 200-day EMA
EUR/USD is trading cautiously below the key resistance of 1.0900 during the North American trading hours. The two major currencies weakened after the breakdown of the Double Top formation during the daily period on October 4, which resulted in a bearish reversal.
The shares are moving near the 200-day Exponential Moving Average (EMA) around 1.0900. A bearish cross, represented by the 20- and 50-day EMA near 1.1020, suggests further weakness ahead.
The 14-day Relative Strength Index (RSI) is falling near 30.00, which indicates that there is strong momentum.
On the other hand, the majors could find support near the 1.0750 high, which was formed from the October 3 low around 1.0450. Meanwhile, the mental image of 1.1000 will be an important resistance for the pair.
ECB questions
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and controls monetary policy in the region. The main mandate of the ECB is to maintain price stability, which means keeping inflation around 2%. Its main tool to achieve this is by raising or lowering interest rates. Higher interest rates will generally make the Euro stronger. The Governing Council of the ECB makes monetary policy decisions at meetings held eight times a year. Decisions are made by the heads of the national banks of the Eurozone and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme cases, 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 results in a weaker Euro. QE is a last resort only when reducing the interest rate is not possible to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid epidemic.
Quantitative tightening (QT) is behind QE. It is done after QE when the economic recovery is underway and inflation starts to rise. While in QE, the European Central Bank (ECB) buys government and corporate bonds from financial institutions to finance them, in QT the ECB stops buying more bonds, and stops invest the growing principal amount in the bonds it already holds. Mostly positive (or bullish) for the Euro.
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