- EUR/USD erases earlier gains after Banque de France chief says ECB should cut at next meeting.
- The pair had been recovering after Lagarde said “game is not over” with inflation.
- Slow economic growth and sticky inflation in the Eurozone could weigh on EUR/USD.
- Federal Reserve Chairman Powell talks about keeping rates higher for longer, and longer.
EUR/USD erases earlier gains and sinks into the 1.0640s on Thursday after Banque de France head and European Central Bank (ECB) policymaker Francois Villeroy de Galhau said, bar a major suprise "we should cut rates at the next meeting."
The next meeting is in May and his comments indicate that he for one wishes to cut interest rates even before the June meeting currently earmarked as the time when most commentators expect the ECB to lower rates. Lower interest rates tend to depreciate a currency as they reduce foreign capital inflows.
De Galhau said there was a risk the ECB might be too late to stave off an economic slowdown if it waited too long before lowering interest rates.
"The risk would be to be behind the curve and to pay a too high cost in terms of economic activity," he added.
EUR/USD rebound stalls
EUR/USD unwound earlier gains made on the back of comments by European Central Bank President Christine Lagarde, who said at a speech in Washington late on Wednesday that “The game (of fighting inflation) is not over,” despite adding, “Growth in Europe is mediocre, much slower than in the US. We’re clearly seeing timid signs of recovery.”
Lagarde’s comments introduced a smidgen of doubt into whether the ECB really will start cutting interest rates in June as markets believe.
Her remark about “Growth in Europe is mediocre,” echoes the view of Rabobank FX Strategists, who argue that whilst there is no risk of a “crisis” in the region, “ the combination of slow growth in the Eurozone and nagging budget pressures could lower the defenses of the EUR going forward." Rabobank suggests a fall to 1.0500 is probable, with risks tilted to the downside.
EUR/USD pressured by talk of higher rates for longer in the US
EUR/USD plummeted at the start of April as bets the Federal Reserve (Fed) would cut interest rates in June quickly melted away amidst stickier-than-expected inflation and robust macroeconomic data.
On Tuesday, Federal Reserve Chairman Jerome Powell said high interest rates would likely be around for longer than previously expected given the little progress being made on inflation in recent months.
The Fed’s Beige Book, a comprehensive economic survey, on Tuesday repeated the view that little progress had been made on inflation but added that growth and employment were a little stronger than expected.
Everything points to the Fed maintaining interest rates at their relatively high (upper limit of 5.5% for the Fed Funds Rate) levels for a while until the behemoth of inflation is finally slain.
Indeed, The CME FedWatch tool, a market gauge of the probability of Fed rate cuts, is showing only a 16% probability of a cut in June (from over 70% only a few weeks ago) whilst the odds of a cut by September are now around 70%.
Technical Analysis: EUR/USD undertakes a youthful recovery
EUR/USD has undergone a volte-face after hitting a floor at 1.0601 on Tuesday (circled). The question now, as most technical questions are, is whether this is a reversal or just a pullback in an ongoing downtrend?
EUR/USD Daily Chart
Momentum has been strong in the short span of the recovery so far, and the Relative Strength Index (RSI) has moved out of oversold, giving a buy signal – another good sign. However, it is too early to draw conclusions.
The intermediate-term downtrend is probably still in force and in the absence of further proof of a reversal, likely to resume and push the exchange rate lower again.
Resistance from previous swing lows nearby at around 1.0700 could act as an obstacle to the recovery and see a rotation back down. The level will, in any case, offer technical resistance and provide a rallying point for bears even if their cause is doomed.
A break below the 1.0601 April lows would post a lower low and indicate a continuation of the downtrend. After that, the next concrete target is at 1.0446, the October 2023 low.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact 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 when simply lowering interest rates is unlikely 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 pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
US Dollar down on steady US inflation– LIVE
June Consumer Price Index (CPI) data came in line with the market's expectations. The US Dollar turned south as an immediate reaction to the news. Markets price in 50 basis points of Fed interest rate cuts by year-end, with the first reduction expected in September.
EUR/USD ticks north with US CPI data, remains below 1.1700
The EUR/USD ticked higher as an immediate reaction to the US CPI figures, which came in line with expectations. The US Dollar quickly changed course and trimmed news.related losses with the pair back to trade below the 1.1700 mark.
Gold price stuck at around $3,350 after US data
Gold price seesaws around $3,350, lacking clear directional impetus. The positive tone of Wall Street after steady US inflation hints at a weaker bright metal during American trading hours.
GBP/USD trades below 1.3450 after US CPI data
GBP/USD resumed its decline following the release of US CPI data, matching analysts' forecast. The US Dollar initially fell with the news, but quickly resumed its decline amid diluted concerns of higher inflationary pressures.
China’s first-half growth remains on track, though activity data signals caution
China's second-quarter GDP beat forecasts again with a 5.2% year-on-year growth, driven by strong trade and industrial production. Yet sharper-than-expected slowdowns in fixed-asset investment and retail sales and falling property prices are a concern.
Best Brokers for EUR/USD Trading
SPONSORED Discover the top brokers for trading EUR/USD in 2025. Our list features brokers with competitive spreads, fast execution, and powerful platforms. Whether you're a beginner or an expert, find the right partner to navigate the dynamic Forex market.