The euro is back on stage

Today it's that time again with the ECB meeting, when is allowed to take the stage and play its part. The interest rate decision is not very exciting in itself, as the consensus is expecting a 25-basis point cut in the deposit rate, which would then be reduced to 3.50%. Nevertheless, there are two exciting aspects this time, Commerzbank’s FX Analyst Antje Praefcke notes.

Euro is more likely to lose ground against the USD

“Market players should not be confused if a message suddenly flickers across the screens about ‘ECB cuts main refinancing rate by 60 basis points’. The central bankers decided to reduce the gap between the main refinancing and deposit rates from 50 to 15 basis points when they adjusted their ‘operational framework’ back in March. Like the deposit rate, the marginal lending rate will be reduced by 25 basis points to 3.90%.”

“The far more important aspect, however, is the question of how the cutting cycle will continue. Will the next move come in October, or not until December? Those in favor of October could cite inflation, which was almost on target at 2.2% in August, and the weakness of the economy. Our experts do not expect the next move to come as early as October, and the market is not convinced either, as it currently sees roughly a 40% chance of this happening.”

“And this is precisely the crux of the matter for the euro. Because if President Lagarde continues to emphasize the data dependency of the decision, the market could interpret this to mean that the next interest rate hike could follow as early as October. The euro could come under pressure and presumably dip further with every weaker price or economic figure in the coming weeks. For me, the risks for the euro are asymmetrically distributed today. Although the single currency is setting the tone in EUR/USD today, I fear that the euro is more likely to lose ground against the dollar.”

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