(MENAFN- Daily Forex)
The European Central bank cut interest rates by 25 basis points at its meeting last Thursday, as expected. According to reliable trading platforms, currency volatility remained low. Obviously, the euro managed to stabilize slightly against the pound sterling and the US dollar. With the start of trading this week, the EUR/USD pair remained stable around and above the resistance of 1.1100, coinciding with the decline of the US dollar against other major currencies ahead of the US interest rate cut decision later this week.
For its part, no firm guidance was provided for the future by the European Central Bank, but it is widely assumed that further cuts will come towards the end of the year as economic forecasts point to weak growth and low inflation. Financial markets were relatively stable last Thursday after a volatile session on Wednesday following the release of US inflation. This sent stock markets soaring, with the S&P 500 initially falling by more than -1.5% only to reverse sharply and close 1% higher. Meanwhile, the US dollar rose slightly as the odds of a 50bp Fed cut next week fell to just 11%.
Last Thursday's data failed to elicit a similar response. The US PPI reading came in slightly higher than expected at 0.2%, with the core index rising 0.3%. Jobless claims came in very slightly higher at 230k versus 227k expected. Now, a 25bp rate cut next week is all but guaranteed, a series of secondary data is unlikely to change the outcome.
Overall, the other major event on Thursday was the European Central Bank meeting, which passed without major surprises. Interest rates were cut as expected, and no firm guidance was given for the month ahead or the rest of the year. The euro was slightly higher after the meeting, with EUR/USD up 0.25% and EUR/GBP up 0.1%.European Central Bank cuts interest rates for the second time
The European Central Bank cut interest rates for the first time in June, and this was widely seen as a premature move as there were signs of inflationary pressures at the time. These signs have since faded and the slowdown in inflation has opened the door for further cuts at Thursday's meeting. The ECB's new economic forecasts appear to point to more cuts as weak growth and low inflation are expected in the coming years.
Overall, these forecasts appear to call for a more aggressive approach to stimulating growth. The first cut appeared to have had little impact and with rates still at 3.5%, it will take at least four more cuts to reach levels where they are no longer constrained. However, the ECB will be reluctant to rush into action too quickly and has remained tight-lipped on plans to cut again. After being dovish for too long when inflation first started to rise, they seemed to turn dovish too early in June. Now, they have cut twice before the Fed started easing monetary policy. Thus, if they cut rates aggressively and allow inflation to pick up again, they will certainly lose any remaining credibility they have. Furthermore, there are still some warning signs in the economy, including service inflation and some data from Germany.
On another note, affecting the EUR/USD. The US Federal Reserve is thought to be likely to step up the pace of cuts after the election when it will not be seen as helping the Democrats and galvanizing the stock markets ahead of the election. Certainly, it will be keen to cut rates until the end of the year to save a soft landing. Concurrently, this seems at risk in light of the recent Labor market data. If the Fed cuts US rates aggressively, the ECB is likely to follow suit, and this could keep EUR/USD relatively stable as rates move in tandem. Technically, the 1.11 level was tested last Thursday and there is no clear catalyst for a move away from this level.
The ECB interest rate decision was in line with strong expectations and was fully thought out, which limited the market impact, and the pound was unable to benefit.
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Despite the recent gains and according to the performance on the daily chart attached, the Euro against the US Dollar EUR/USD is still in a phase of breaking the upward trend. Technically, the bulls will not regain control of the trend without settling above the resistance of 1.1200 again. Thus, we expect the Euro Dollar price to remain in its current range until the markets and investors react to the announcement of the US interest rate decisions later this week, which will determine the fate of the US Dollar price for the rest of 2024. In contrast, and over the same period of time, the support level of 1.0885 will remain the biggest threat to the future bullish outlook. Finally, we still prefer to sell the Euro Dollar.
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