Euro under pressure as ECB eyes rate cut

The European currency is under pressure on Tuesday as the Euro trades close to a five-month low against the dollar near the round-level support of 1.0600.

The EURUSD currency pair is vulnerable to further downside as investors see the policy divergence between the Federal Reserve and the European Central Bank extending further.

Market expectations for the ECB to begin reducing interest rates from the June meeting have escalated. The weak Eurozone economic outlook and consecutive cooling core inflationary pressures for eight months have increased the likelihood of the ECB pivoting to rate cuts.

Last week, the bank’s President Christine Lagarde said if a fresh assessment increased policymakers’ confidence that inflation is heading back to target, then it “would be appropriate” to cut interest rates, according to Reuters.

The ECB chief delivered the statement in an interview post policy meeting in which the Main Refinancing Operations Rate was kept unchanged at 4.5%.

Meanwhile, traders have priced out expectations for the Fed to rate cuts in the June and July policy meetings as core U.S. inflation remains stronger than expected in three months this year. This has strengthened the argument that the Fed should keep interest rates restrictive for a longer period.

Currently, investors expect that the Fed will start reducing interest rates from the September meeting. The Fed pivoting to rate cuts later than the ECB will stretch the policy divergence.

Going forward, speeches from various Fed policymakers will guide market expectations for Fed rate cuts.

Fed policymakers are expected to support keeping interest rates higher until they are convinced that inflation will sustainably return to the desired rate of 2%.

(Source: OANDA)