EUR/USD falls sharply as ECB cuts Deposit Facility rate by 25 bps to 3%
|- EUR/USD weakens and slides below 1.0500 as the ECB cuts interest rates by 25 bps.
- The ECB refrained from committing a pre-defined interest rate cut path.
- No surprise in the US CPI data cemented Fed rate cut bets for next week’s meeting.
EUR/USD refreshes weekly low around 1.0470 in Thursday’s North American session after the European Central Bank (ECB) policy meeting in which the central bank reduced its Rate on Deposit Facility by 25 basis points (bps) to 3%, as expected. Similarly, the Main Refinancing Operations Rate was reduced by 25 bps to 3.15%. This was the third straight 25 bps interest rate cut by the ECB in a row and the fourth of the year.
Traders had already priced in 25 bps interest rate cut as Eurozone price pressures seem under control and the economy continues to deteriorate.
In the monetary policy statement, the ECB commented that domestic inflation has edged down but remains high, mostly because wages and prices in certain sectors are still adjusting to past inflation surges with a substantial delay. The ECB staff sees the headline inflation averaging 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027. The central bank continued to refrain from committing to any pre-defined rate cut path.
Meanwhile, investors await the interest rate guidance from ECB President Christine Lagarde at the press conference after the policy decision to be held at 13:45 GMT. Investors will also like to know the impact of higher import tariffs by the United States (US) when President-elect Donald Trump takes office next month.
On the political front, German Chancellor Olaf Scholz submitted a request for a no-confidence vote on December 16 to the President of the Bundestag, Bärbel Bas, a necessary precursor for holding elections on February 23, 2025, Euronews reported. German government collapsed after Scholz dismissed Finance Minister Christian Lindner, dissolving the three-party coalition.
Daily digest market movers: EUR/USD drops while US Dollar bounces back despite dovish Fed bets
- EUR/USD declines as the US Dollar (USD) recovers intraday losses and turns positive in Thursday’s North American session. The US Dollar Index (DXY), which tracks the Greenback value against six major currencies, climbs to near 106.80 even though sticky US inflation data for Novembem boosted dovish Federal Reserve (Fed) bets.
- As measured by the Consumer Price Index (CPI), headline inflation accelerated to 2.7% from the prior release of 2.6%, and the core CPI – which excludes volatile food and energy prices – rose steadily by 3.3%.
- US inflation data boosted Federal Reserve (Fed) dovish bets for the policy meeting announcement on Wednesday. According to the CME FedWatch tool, the probability for the Fed to reduce interest rates by 25 bps to 4.25%-4.50% next week has escalated to almost 99%d from 88% on Tuesday.
Technical Analysis: EUR/USD slides below 1.0500
EUR/USD falls below the psychological figure of 1.0500. The outlook of the major currency pair remains bearish as the 20-day EMA near 1.0560 acts as key resistance for the Euro (EUR) bulls.
The 14-day Relative Strength Index (RSI) wobbles near 40.00. Should the RSI fall below this level, a bearish momentum will trigger.
Looking down, the November 22 low of 1.0330 will be a key support. On the flip side, the 50-day EMA near 1.0680 will be the key barrier for the Euro bulls.
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.
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