EURUSD trades cautiously around 1.0420 in Thursday’s European session as investors focus on the European Central Bank’s monetary policy decision later in the day, following the Fed’s decision on Wednesday to keep interest rates unchanged.
The ECB is widely anticipated to cut its Deposit Facility Rate by 25 basis points to 2.75%, with the Main Refinancing Operations Rate sliding to 2.9%, and leave the door open for further policy easing.
Traders have already priced in four successive quarter point interest rate cuts this year which would push the key Deposit Facility Rate to 2%.
A string of ECB officials has been comfortable with dovish bets, but not with the timeframe, and they see the 2% rate coming by year-end. ECB officials have also anticipated 2% as a neutral rate, which neither stimulates nor weighs on economic growth.
Dovish ECB bets are based on the assumption that inflationary pressures in the Eurozone are sustainably on track to return to the central bank’s target of 2%.
Investors are also worried that potential tariffs ordered by US President Donald Trump could falter the Eurozone economic outlook, which is already going through a rough phase.
Flash Eurozone Gross Domestic Product data for the fourth quarter of 2024 showed that the economy was flat after expanding 0.4% in the third quarter. Economists expect the shared bloc to have expanded by 0.1%.
The shrinking German economy remained the weak link of the Eurozone’s flat GDP growth. Flash German GDP data shows that the economy contracted by 0.2% in the last quarter of 2024 YoY, slower than the 0.3% decline in the third quarter.
Compared to the same quarter of 2023, the Eurozone economy rose steadily by 0.9%, softer than estimates of 1% growth.
The Federal Reserve’s monetary policy announcement on Wednesday left interest rates unchanged in the range of 4.25-4.50%.
The DXY Dollar Index, which tracks the greenback’s value against six major currencies, wobbles around 108.00. The Fed was already expected to announce a pause in the policy-easing spell, as market participants were worried about stalling progress in the disinflation trend towards the central bank’s target of 2%.
In Wednesday’s press conference, Fed Chair Jerome Powell adopted a cautious stance on interest rates and said that the US central bank would resume the rate-cut cycle only after seeing “real progress on inflation or at least some weakness in the labour market”.
In December, the core Consumer Price Index (CPI), which excludes volatile food and energy prices, decelerated to 3.2% YoY, but remained well above the Fed’s desired rate of 2%.
For more cues on the current status of inflation, investors will focus on the US Personal Consumption Expenditure Price Index (PCE) data for December, which will be released on Friday.
Asked if the Fed will follow President Trump’s call for immediate rate cuts, Powell said, “the committee is very much in the mode of waiting to see what policies are enacted.”
In Thursday’s session, investors will focus on the preliminary US Q4 GDP data.
The US economy is expected to have grown by 2.6%, compared to the same quarter of 2023, but slower than the 3.1% growth in the previous quarter.
EURUSD chart by TradingView
(Source: OANDA)
