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Euro-Dollar weakens ahead of Fed, Lagarde cites lower inflation

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The EURUSD pair declined to the lower 1.0800s on Wednesday, after several European Central Bank speakers, including President Christine Lagarde and Bank of Ireland Governor and ECB governing council member Gabriel Makhlouf, cited lower inflation.

Lagarde highlighted lower wage inflation, something which at previous meetings she said the ECB would be watching closely before deciding future policy moves.

Lower inflation increases the probability that the ECB will opt to cut interest rates, which would be a negative move for the Euro and the EURUSD pair.

“Average wage growth in 2024 for all existing wage contracts fell from 4.4% at the time of our January Governing Council meeting to 4.2% at the time of our meeting in March,” Lagarde said at the ‘ECB and its Watchers’ conference in Frankfurt.

She reiterated that policymakers need more evidence that inflation is receding but, if data outcomes are in line with current expectations, the central bank can start dialing back rate hikes in June.

There are two camps – those who favour waiting until the ECB’s June meeting to decide and a smaller group that wants to keep alive the possibility of an early spring rate cut.

On Tuesday, ECB Vice President Luis de Guindos maintained allegiance with the June camp after he said “we have to wait,” because “services inflation” remains too high.

Will Fed change forecasts?

The Federal Reserve is scheduled to complete its March policy meeting later Wednesday and while it is not expected to alter interest rates, there is a chance it could revise its quarterly forecasts and accompanying statement. This could change the outlook for interest rates and therefore the US Dollar valuation.

The EURUSD could see volatility as speculation is mounting that the Fed will revise its economic forecasts in the Summary of Economic Projections (SEP), and the “dot plot”, which reflects the Board of Governors of the Fed’s consensus of the future path of rates.

In the previous SEP, officials had forecast three 25 basis points (rate cuts in 2024, but some analysts now think there is a material risk that this could be revised down to two 25 bps cuts to reflect inflationary pressures remaining elevated.

“The summary of economic projections will be updated and contains hawkish risks in our assessment with the committee potentially projecting fewer cuts in 2024,” said David Doyle, head of economics at Macquarie, in a note about the Fed meeting.

(Source: OANDA)