Euro Forecast: EUR/USD into Shrug Off Any Hints of an ECB Interest Rate Cut

FUNDAMENTAL EURO FORECAST: NEUTRAL

Euro Forecast: EUR/USD into Shrug Off Any Hints of an ECB Interest Rate Cut

FUNDAMENTAL EURO FORECAST: NEUTRAL
Based on reports, the European Central Bank is disappointed the markets priced in only a marginal probability of an interest rate after its President Christine Lagarde's press conference on January 21.
That suggests other members of the ECB's Governing Council will try to push out the message that a cut will be likely to boost economic growth and weaken the currency.
At present, the markets are pricing in only a 70% chance of a tiny cut by the end of this calendar year so if the ECB manages to persuade them to drive that figure higher then EUR/USD may fall back.
However, the markets will likely take any ECB hints with a pinch of salt, which makes EUR/USD largely unscathed.


EURO PRICE TO DISCOUNT RATE CUT HINTS

If the reports are to be believed, the markets have been assumed to get a hint at the January 21 press conference from European Central Bank President Christine Lagarde a Eurozone interest rate cut is an opportunity. As they did not, it would not be any surprise if additional members of the ECB's Governing Council lineup in the upcoming few weeks to push the message out at a less subtle manner.

With the ECB's deposit rate currently at minus 0.5percent there is obviously little room for further reductions and current market pricing indicates just a 70% chance of a move to minus 0.6percent by the end of this year. Nonetheless, if the markets do take the clue in the days ahead, a drop in EUR/USD -- albeit a little one -- would be no surprise.

EUR/USD PRICE CHART, DAILY TIMEFRAME (AUGUST 3, 2020 -- JANUARY 28, 2021)

The issue for the ECB is that this type of tiny rate cut would do virtually nothing to help the Eurozone economy recover from the effect of the coronavirus pandemic. Moreover, while the ECB want a decline in the EUR/USD exchange rate -- which would also assist an economic recovery -- that the markets are very likely to take all this with a massive pinch of salt.

Truth is, any further easing of Eurozone monetary policy is probably still many months off and the markets know that, so any change in interest rate expectations will be restricted and any fall in EUR/USD will be quite limited too. The pair is therefore more likely to sway softly with hazard sentiment; increasing because the markets become more optimistic and falling as that confidence drains away.

WEEK AHEAD: GDP AND INFLATION
Against this history, economic data will likely continue to have small influence on the Euro but there are still a few significant statistics due. On Tuesday, flash GDP growth figures are expected to show drops to minus 1.9percent quarter/quarter and minus 6.3percent year/year in Q4, emphasizing the impact of the pandemic. The following day, flash inflation data for January are forecast to reveal climbs to 0.1% year/year in the headline rate and 0.3% in the core rate. Final PMI numbers for January, unemployment and retail sales statistics will all likely be discounted.

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