ECB Rate Cut Increases Pressure on EUR/USD

The European Central Bank (ECB) recently announced its interest rate policy for July, keeping the figures unchanged for the second month. The European Union’s central bank — which has the primary task of maintaining price stability for the euro — made the decision based on critical factors, such as inflation rates and other economic indicators, as it works towards meeting its targets for the Eurozone economy.

The ECB Interest Rate Cut

June 2024 saw the ECB take a step forward in cutting rates for the first time since September 2023, when the cycle of rate hikes ended. In June, the ECB announced cutting the interest rates on the main refinancing operations, the marginal lending facility, and the deposit facility to 4.25%, 4.50%, and 3.75%, respectively. The bank cut the interest rate by 25 basis points.

The foreign exchange (forex or FX) market responded as the EUR/USD fell following the announcement. The pair, however, picked up the following week, but the EUR has struggled against the U.S. dollar (USD) ever since. The ECB’s recent decision to maintain the June rates now piles more pressure on the EUR/USD as Europe prepares for the Paris 2024 Olympic Games.

The Euro Under Pressure

The ECB set the stage for a rate cut in its May meeting after its meeting notes for April were released. In its meeting, which was held from 10 to 11 April, the ECB noted that "It was seen as plausible that the Governing Council would be in a position to start easing monetary policy restriction from June." However, a few policymakers disagreed with the general disposition of the ECB, citing the continued economic restriction due to the central bank’s rates despite initial cuts.

The European Central Bank’s decision to lower interest rates is based on the continuation of wage and inflation trends. Still, wage pressures caused the bank to adjust its inflation forecast, while France’s political events in June increased the downward pressure on the euro after French bonds saw increased risk premiums. The latter is already significant in the French-German spread and comes amidst fears of impacting other markets.

The ECB’s rate decision was anticipated to be a key factor in managing the effects of unchanged rates as markets follow developments within the European Union. September will hold answers for investors as they seek clarity on the ECB’s decision to potentially hike rates.

U.S. Dollar Recovers

Despite recent poor performances, the U.S. dollar has recently gained the edge over the euro due to several factors. The ECB’s decision to cut rates in June triggered a loss against the USD, which worsened as France's political situation evolved. Conversely, the U.S. Federal Reserve (also known as The Fed) has hinted that it may maintain the high interest rates for longer than the ECB bolstered the USD. Investors turned to the USD for higher returns and may remain bullish on the currency shortly.

The Fed is forced to maintain its hawkish rates as the U.S. inflation remains high. The Fed’s reluctance to cut rates keeps demand for the USD high among investors. The economy has also shown positive growth in the robust labor market, higher consumer spending, and development in the manufacturing sectors.

September: Hope for the Euro?

The ECB’s President, Christine Lagarde, has said that the interest rate decision for September 12 remains open, providing some hope for the currency. While the ECB has not ruled out rate hikes, there are no hints about its next move. The apex bank also appreciates the domestic price pressures and has said that inflation will be above its target well into 2024.

While addressing the press last week, Lagarde said, “We are determined to ensure that inflation returns to our 2% medium-term target in a timely manner. We will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim.” And that the ECB will "continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.”

On the other hand, according to its governor, Christopher Waller, the U.S. Federal Reserve may also join the trend of cutting rates. Waller said that the U.S. apex bank is “getting closer” to a rate cut, joining the ECB, Bank of Canada, Swiss National Bank, Sweden’s Riksbank, and the People's Bank of China, who have all begun reducing rates.

EUR/USD Analysis

The EUR/USD remains mildly bearish, with growing pressure as sellers watch key price levels. The EUR gained against the USD on Monday but could not sustain the slight increase before falling to a fresh two-week low below 1.0850 on the 4-H candle. The support levels 1.0820, 1.0770, and 1.0725, and the resistance levels 1.0870, 1.0910, and 1.0945 are essential watches for investors.

Key economic events for the month include the Global PMIs for Wednesday, 24 July, the Advance USD GDP for Thursday, July 25, and Core PCE for Friday, 26 July. Europe’s manufacturing sector has seen little growth since 2022, and this will be a critical trend for markets to consider. Other events include the first estimate of the Q2 Gross Domestic Product (GDP), the Eurozone July Consumer Confidence, and June Existing Home Sales reports.

On the political side, the European Union Parliament conducted its elections in June, electing 720 members of the Union. Analysts expect the new parliament to address Europe’s economic issues and find common grounds to build coalitions. As always, political developments in the U.S., like the current elections, will also impact the markets as investors eye a feisty contest between Donald Trump and Kamala Harris in the November 2024 polls.