EUR shows strength amid ECB rate cut uncertainty

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The EURUSD pair is clinging to gains near 1.0900 in Monday’s European trading, as the major currency pair remains in bullish territory due to investors’ higher risk appetite.

The Euro has performed strongly in the past few trading sessions as market participants turn slightly cautious about whether the European Central Bank will extend the policy-tightening spell beyond the June meeting.

The ECB is widely anticipated to start reducing interest rates from the June meeting.

However, ECB policymakers remain divided over the rate-cut move in the July meeting. A few policymakers remain worried that an aggressive rate-cut cycle could revamp price pressures and offset the impact yet made on inflation.

Last week, ECB board member Isabel Schnabel said that depending on incoming data, a rate cut in June may be appropriate, but the path beyond June is much more uncertain. Schnabel added that she cannot pre-commit to any particular rate path due to very high uncertainty.

On the economic data front, investors will shift focus to the Eurozone and the U.S. preliminary Purchasing Managers Index (PMI) data for May, which will be published on Thursday. The PMI data will indicate their economic outlook.

EURUSD is expected to remain quiet as investors shift focus to the Federal Open Market Committee (FOMC) minutes for the May meeting, which will be published on Wednesday.

The FOMC minutes will provide a detailed explanation behind interest rates remaining steady and policymakers’ views about the interest rate outlook.

The communication from Fed policymakers on the interest rate outlook is expected to have remained hawkish as inflationary pressures in the first three months of this year accelerated. However, the Consumer Price Index (CPI) data for April declined as expected due to lower prices of utility gas piped services, and used car and trucks.

Fed policymakers are expected to have avoided supporting for further policy-tightening. Though the decline in price pressures has provided some relief that the progress in the disinflation process has not stalled, Fed policymakers remain leaning towards a restrictive policy stance for a longer period to build confidence that inflation will sustainably return to the desired rate of 2%.

Last week, New York Fed Bank President John Williams said the monetary policy is restrictive and is in a good place. He said he doesn’t see any economic indicator suggesting the need to change the stance of monetary policy now.

When asked about the inflation outlook, Williams said: “In the very near term, I don’t expect to get that greater confidence that we need to see on inflation progress towards a 2% goal,” according to Reuters.

(Source: OANDA)