Euro slides on ECB dovish bets, US inflation in focus

EURUSD slides to near 1.0530 in Tuesday’s European session as investors turn cautious ahead of the European Central Bank monetary policy meeting on Thursday.

Traders have priced in a 25-basis points (bps) reduction in the Deposit Facility Rate to 3%. This would be the third interest rate cut decision by the ECB in a row.

Market experts assume that a slew of factors, including Donald Trump’s victory in the US presidential elections, political turmoil in France and Germany, and a sharp slowdown in the Eurozone business activity compelled financial markets to factor in an interest rate reduction in the policy meeting on Thursday.

The fallout of the government in France and instability in Germany and France could have a direct impact on the Eurozone economic growth, which will weigh on price pressures, as these two are the largest economies of the trading bloc. The impact of Trump’s tariffs on Europe when he reaches the White House is still uncertain.

ECB policymakers are divided over whether the impact of Trump tariffs will be inflationary or deflationary on the Eurozone economy.

A handful of ECB policymakers assume that Trump’s tariffs will weaken the Euro against the USD significantly, a scenario that will make imports costlier for individuals and boost price pressures.

On the contrary, a few officials forecast risks of inflation undershooting the bank’s target as higher tariffs will dampen the Eurozone’s export sector.