EUR/USD extended its weekly recovery on Thursday, marking its fourth consecutive daily gain and challenging the critical 200-day Simple Moving Average (SMA) around 1.0870, coming at shouting distance from the key 1.0900 barrier.
Meanwhile, the US Dollar’s (USD) rally lost further momentum, sponsoring the fourth daily decline in the US Dollar Index (DXY), which at some point revisited the area below the 104.00 level.
This upward move in EUR/USD coincided with extra weakness in US yields across the spectrum, in line with a modest pullback in 10-year German bund yields soon after reaching new highs around 2.45%.
In the meantime, expectations are building for a 25-basis-point rate cut by the Federal Reserve (Fed) next month, a view that was further reinforced by sticky PCE data in September and so-far firm readings from the US labour market, all prior to Friday’s crucial Nonfarm Payrolls (NFP).
In Europe, the European Central Bank (ECB) recently implemented a 25-basis-point rate cut on October 17, reducing the Deposit Facility Rate to 3.25%, in line with expectations. ECB officials have maintained a cautious stance on further rate decisions, emphasising the significance of upcoming economic data.
Within the ECB, opinions on further rate cuts vary. Earlier on Thursday, ECB President Christine Lagarde reiterated to a French newspaper that the bank expects eurozone inflation to sustainably reach its 2% target by 2025. Meanwhile, Governing Council member Fabio Panetta warned that the ECB should avoid reducing interest rates too cautiously, as this could cause inflation to drop excessively. At a banking conference in Rome, Panetta added that monetary conditions in the eurozone remain restrictive and suggested that further easing may be necessary.
Across the road, ECB board member Isabel Schnabel advocated for a gradual approach to monetary policy, opposing sharp rate cuts. She argued that inflation is unlikely to fall below the ECB’s 2% target, justifying a measured approach to rate adjustments. This stance contrasts with some policymakers from southern eurozone nations who are concerned that inflation may fall too low, possibly necessitating cuts below the neutral rate.
As both the Fed and ECB assess their next moves, EUR/USD’s trajectory will likely be shaped by broader economic conditions. With the US economy currently outperforming the eurozone, the USD may retain its strength in the short to medium term. Furthermore, a Trump victory in the upcoming US presidential election could further bolster the Greenback.
Comments