🪙EURUSD Holds at 1.1400 Ahead of ECB Decision

The European Central Bank (ECB) is scheduled to announce its interest rate decision at 2:15 PM CEST (01:15 PM BST), followed by a press conference with President Christine Lagarde at 2:45 PM CEST (01:45 PM BST)

The European Central Bank is widely anticipated to implement another 25 basis point rate cut today, which would lower the deposit rate to 2.00%. This would represent half the peak rate of 4% maintained through late 2023 and early 2024. Expectations for this cut are underpinned by several factors, including a continued decline in headline CPI inflation, exacerbated by lower energy prices, and the disinflationary impact of US tariffs increasing product availability in Europe. The pertinent question now is whether the ECB will conclude its easing cycle or, given continued falling inflation and trade uncertainty, signal an additional two or three cuts.

Interest rates in the Eurozone have already seen significant reductions. It is noteworthy, however, that these cuts have been moderate and not a crisis response, potentially enhancing the long-term prospects of achieving the inflation target. Source: Bloomberg Finance LP, XTB

Expectations for Further ECB Moves:

• Dovish Stance: The ECB's Governing Council is expected to maintain a moderately dovish tone, preserving flexibility for future actions. Bloomberg's ECBspeak index, which reflects Governing Council sentiment, indicates an increasingly dovish bias, with a focus on the disinflationary impact of US tariffs on the currency union.

• Further Rate Cuts: The baseline scenario anticipates one additional 25 basis point cut in September. The probability is tilted towards further policy easing, though a potential US trade agreement in July could alter the outlook for subsequent moves.

• Inflation Concerns: Wage growth has decelerated, and inflation in May fell below the ECB's 2% target. The latest inflation forecasts from ECB economists did not account for the US tariff announcement of April 2nd and may be further revised downwards. Interestingly, even the hawkish governor of Austria's central bank suggests that tariffs could lead to a decline in consumer prices.

• Impact of Tariffs and Other Factors: US trade policy is negatively affecting prices of European products, and there is an absence of retaliatory tariffs on American goods. Additionally, crude oil and other energy commodity prices are falling, impacting, for example, electricity costs.

Expectations for ECB interest rates point to another cut in September of this year. However, this could change if a trade agreement between the US and the European Union were to materialize in July. Source: Bloomberg Finance LP, XTB

Impact on Euro Trading:

• Dovish ECB Stance: Should policymakers maintain a dovish tone, a retreat below 1.1400 on the EURUSD pair cannot be ruled out. The ECB remains cautious due to the ongoing trade tensions.

• Policy Divergence: If the US Federal Reserve (Fed) maintains a more hawkish stance (i.e., inclined to keep rates higher or reduce them more slowly), the interest rate differential between the Eurozone and the US could widen. Theoretically, this should disadvantage the euro against the dollar. On the other hand, EURUSD remains elevated due to a prevailing aversion to the dollar linked to Trump's policies.

• Potential Euro Rebound: The European economy is showing signs of improvement, and the inflation target has been met. Furthermore, the European Union plans to spend approximately €800 billion on additional armaments, which could lead to further economic revival. This might also provide an inflationary impulse, discouraging ECB members from further cuts.

• Increased Uncertainty: Heightened uncertainty surrounding the US-EU trade dispute may prompt the ECB to adopt a more cautious stance. If Christine Lagarde expresses concerns about the economic outlook, this could confirm a dovish bias and trigger a larger correction in EURUSD. Conversely, if the ECB points to potential upside risks to inflation and Lagarde suggests caution in assessing the impact of tariffs, it could lead to a resumption of the euro's upward trend.

Technical Outlook for EURUSD

EURUSD remains above the 1.1400 level and is trading within an upward trend channel. A dovish ECB stance could lead to a test of the channel's lower boundary, and a break below 1.1350 might precipitate a larger correction. Nevertheless, the zone around 1.1250 is likely to prove a difficult hurdle to breach. US bond yields remain elevated (reflected in low TNOTE prices), but this has not translated into support for the US dollar. However, if the ECB were to signal that interest rates have reached their target level, it could even lead to a breakout above the upper limit of the upward trend channel and a move beyond 1.1500.

Source: xStation5