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Euro Forecast: EUR/USD to Shrug Off Any Hints of an ECB Interest Rate Cut

Euro Forecast: EUR/USD to Shrug Off Any Hints of an ECB Interest Rate Cut

Martin Essex, MSTA, Analyst

Fundamental Euro Forecast: Neutral

  • According to reports, the European Central Bank is disappointed that the markets priced in only a marginal probability of an interest rate cut after its President Christine Lagarde’s press conference on January 21.
  • That suggests other members of the ECB’s Governing Council will try to push the message out that a cut is possible to boost economic growth and weaken the currency.
  • At present, the markets are pricing in just a 70% chance of a tiny cut by the end of this year so if the ECB manages to persuade them to push that figure higher then EUR/USD might well fall back.
  • However, the markets will likely take any ECB hints with a pinch of salt, leaving EUR/USD largely unscathed.

Euro price to discount rate cut hints

If the reports are to be believed, the markets were supposed to pick up a hint at the January 21 press conference by European Central Bank President Christine Lagarde that a Eurozone interest rate cut is a possibility. As they didn’t, it would be no surprise if other members of the ECB’s Governing Council line up in the next few weeks to push out the message in a less subtle way.

With the ECB’s deposit rate already at minus 0.5% there is clearly little room for further reductions and current market pricing suggests only a 70% chance of a move to minus 0.6% by the end of this year. Nonetheless, if the markets do take the hint in the days ahead, a drop in EUR/USD – albeit a modest one – would be no surprise.

EUR/USD Price Chart, Daily Timeframe (August 3, 2020 – January 28, 2021)

EUR/USD Daily Chart

Source: IG (You can click on it for a larger image)

The problem for the ECB is that such a tiny rate cut would do almost nothing to help the Eurozone economy recover from the impact of the coronavirus pandemic. Moreover, while the ECB would like a reduction in the EUR/USD exchange rate – which would also assist an economic recovery – the markets are likely to take all this with a large pinch of salt.

Truth is, any further easing of Eurozone monetary policy is probably still many months away and the markets know that, so any change in interest rate expectations will be limited and any fall in EUR/USD will be very limited too. The pair is therefore more likely to sway gently with risk sentiment; rising as the markets become more optimistic and falling as that optimism drains away.

Click here for a forex trader’s guide to the ECB

Week ahead: GDP and inflation

Against this background, economic data will likely continue to have little impact on the Euro but there are still some important statistics due. On Tuesday, flash GDP growth figures are expected to show drops to minus 1.9% quarter/quarter and minus 6.3% year/year in Q4, emphasizing the impact of the pandemic. The next day, flash inflation data for January are forecast to show rises to 0.1% year/year in the headline rate and 0.3% in the core rate. Final PMI numbers for January, unemployment and retail sales data will all likely be ignored.

We look at currencies regularly in the DailyFX Trading Global Markets Decoded podcasts that you can find here on Apple or wherever you go for your podcasts

--- Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.