Euro Forecast: EUR/USD To Shrug Off Any Hints Of An ECB Interest Rate Cut

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Fundamental Euro Forecast: Neutral

  • According to reports, the European Central Bank is disappointed that the markets priced in only a marginal probability of an interest rate cut after its President Christine Lagarde’s press conference on January 21.
  • That suggests other members of the ECB’s Governing Council will try to push the message out that a cut is possible to boost economic growth and weaken the currency.
  • At present, the markets are pricing in just a 70% chance of a tiny cut by the end of this year so if the ECB manages to persuade them to push that figure higher then EUR/USD might well fall back.
  • However, the markets will likely take any ECB hints with a pinch of salt, leaving EUR/USD largely unscathed (FXE,UUP).

Euro Price To Discount Rate Cut Hints

If the reports are to be believed, the markets were supposed to pick up a hint at the January 21 press conference by European Central Bank President Christine Lagarde that a Eurozone interest rate cut is a possibility. As they didn’t, it would be no surprise if other members of the ECB’s Governing Council line up in the next few weeks to push out the message in a less subtle way.

With the ECB’s deposit rate already at minus 0.5% there is clearly little room for further reductions and current market pricing suggests only a 70% chance of a move to minus 0.6% by the end of this year. Nonetheless, if the markets do take the hint in the days ahead, a drop in EUR/USD – albeit a modest one – would be no surprise.

EUR/USD Price Chart, Daily Timeframe (August 3, 2020 – January 28, 2021)

EUR/USD Daily Chart

Source: IG

 

 

The problem for the ECB is that such a tiny rate cut would do almost nothing to help the Eurozone (EZU) economy recover from the impact of the coronavirus pandemic. Moreover, while the ECB would like a reduction in the EUR/USD exchange rate – which would also assist an economic recovery – the markets are likely to take all this with a large pinch of salt.

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