EUR/USD falls as ECB Centano backs huge interest rate cuts in December

EUR/USD falls further after several ECB policymakers said they expect the deposit rate to fall below the neutral level of around 2% or 2.25%.
ECB Lagarde expressed hope that inflation would fall at a faster than expected pace.
The uncertainty surrounding the US presidential election is expected to keep market sentiment high.

During Wednesday’s North American session, the EUR/USD rate weakens to nearly 1.0760 as the outlook for the euro (EUR) deteriorates. The European currency is under pressure due to a faster-than-expected fall in inflation and a growing risk of a downturn in the euro zone economy, which has sparked speculation about further interest rate cuts by the European Central Bank (ECB).

The ECB has already cut its deposit rate three times this year and is widely expected to cut it again at its December meeting. Therefore, investors are starting to anticipate the likely direction of ECB interest rates – a level that should allow inflation to be kept under control and growth to accelerate. Contrary to market expectations, the president of the Bank of Portugal and ECB decision-maker Mario Centeno said that the option of reducing interest rates by 50 basis points (bps) in December is being considered. In his tardy Europe comments, Centeno warned that downside risks to economic growth were growing.

According to Reuters, several ECB officials have recently debated the possibility of lowering interest rates below the so-called neutral rate in order to stimulate economic growth and reduce inflation risks. This week, the Governor of the Lithuanian Central Bank and member of the ECB Governing Council, Gediminas Šimkus, discussed the risk of inflation remaining too low. “If disinflation processes persist, it is possible that interest rates will be lower than natural levels,” Šimkus said. According to market experts, the neutral rate is around 2% or 2.25%.

ECB President Christine Lagarde on Tuesday expressed confidence that inflation would sustainably return to the bank’s 2% target in 2025, earlier than previously expected, she said in an interview with Bloomberg on the sidelines of an International Monetary Fund (IMF) meeting. . Asked about the prospects for monetary policy, Lagarde said the direction was clear, but the pace of further interest rate cuts would depend on incoming economic data.

Daily Market Change Summary: EUR/USD Hits Fresh Three-Month Low

EUR/USD is approaching 1.0760 during American trading hours. The major currency pair is facing selling pressure from the rise of the US dollar (USD). The U.S. Dollar Index (DXY), which tracks the dollar against six major currencies, extends its gain to 104.20 and is on target to re-hit August’s high of 104.45. The dollar strengthened amid political uncertainty ahead of the US presidential election and firm expectations that the Federal Reserve’s (Fed) easing cycle will be more gradual than previously expected.
The sheer strength of the U.S. dollar can also be attributed to growing market bets on former U.S. President Donald Trump’s victory in the elections that will take place in less than two weeks. However, the latest Reuters/Ipsos polls show current Vice President Kamala Harris leading by a slim margin. A Trump victory is expected to result in higher tariffs and lower taxes, which could force the Federal Reserve (Fed) to return to a restrictive policy stance.
Meanwhile, markets expect the Fed to deliver a further 50 basis point (bp) rate cut in the remaining year, suggesting there will be two 25 basis point rate cuts in November and December, according to the CME FedWatch tool.
The Fed is unlikely to repeat the massive rate cut of September this year, as the latest nonfarm payrolls (NFP) data showed that labor demand had not slowed significantly. “Wage growth has slowed since its peak in 2022 but is still stronger than at any point in the decade before the pandemic,” UBS analysts said.
During Wednesday’s session, investors will pay particular attention to the Fed’s Beige Book, which will be published at 18:00 GMT. Several Fed and ECB members will speak, including President Lagarde.

Technical analysis: EUR/USD falls to around 1.0750

EUR/USD is approaching 1.0760 during North American trading hours. The outlook for the major currency pair remains bearish as it remains below the 200-day exponential moving average (EMA), which is hovering around 1.0900.

The downward move on the common currency pair began after the Double Top formation was broken on the daily time frame near the September 11 minimum at around 1.1000, which resulted in a reversal of the downward trend.

The 14-day relative strength index (RSI) is falling below 30.00, indicating a forceful downtrend. However, a recovery move remains on the cards as conditions become oversold.

On the other hand, the major could experience more weakness if it slips below the rising trend line at 1.0750, which is plotted from the October 3 low near 1.0450. Meanwhile, the key resistance for the pair will be the 200-day EMA and the psychological number 1.1000.