- ECB rate cut: The ECB reduced the main refinancing rate to 4.25% and the deposit facility rate to 3.75%, aligning with market expectations.
- Inflation projections: the ECB forecasts core inflation of 2.8% for 2024, 2.2% for 2025 and 2.0% for 2026.
- Economic growth: Eurozone GDP grew by 0.3% in the first quarter of 2024, indicating a recovering economy.
In the early hours of the New York session on Thursday, the EUR/USD pair saw a notable rise as the European Central Bank (ECB) announced a reduction in its key interest rates by 25 basis points (bps). This policy decision was widely anticipated by market participants and has significant implications for the eurozone economic outlook. The ECB's decision to cut rates is aimed at bringing inflation back to its target, offering a mixed but hopeful outlook for traders and investors.
ECB policy decision and rate cuts
The ECB's decision to reduce the main refinancing operations rate to 4.25% and the deposit facility rate to 3.75% is in line with market expectations. These reductions are part of a broader strategy to manage inflation and stimulate economic activity within the eurozone. The central bank has also published its latest inflation projections, forecasting an average annual core inflation rate of 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026.
ECB authorities had signaled their intention to reduce borrowing rates by 25 basis points, confident that inflation would return to the desired target of 2%. This decision underlines the ECB's proactive approach to addressing inflationary pressures and supporting economic growth.
Inflation and economic outlook
The path to achieving the 2% inflation target appears complicated due to the persistence of high services inflation. This inflationary pressure is significantly influenced by wage growth and an improving economic outlook for the eurozone. Services inflation rose to 4.1% in May, marking the highest level in seven months. This increase is partly due to wage increases, which contributes to the overall inflationary environment.
In addition to inflation dynamics, the economic performance of the eurozone has shown signs of resilience. The Gross Domestic Product (GDP) grew by 0.3% in the first quarter of 2024, after two consecutive quarters of contraction in 2023. This growth indicates a recovering economy driven by the ECB's accommodative policies.
Interest rate outlook and market expectations
Looking ahead, the ECB is expected to maintain a data-dependent stance in its future interest rate decisions. Officials are unlikely to commit to further rate cuts any time soon, including at the next meeting in July. However, financial markets anticipate that the ECB could implement two more rate cuts later this year. This cautious approach reflects the central bank's focus on economic indicators and evolving market conditions.
Technical analysis: EUR/USD
The EUR/USD pair remains confined within a tight range below the 1.0900 level. The major currency pair has formed an inverted head and shoulders (H&S) pattern on the daily chart, suggesting a possible bullish reversal. A break above the neckline, marked at the April 9 high of 1.0885, could trigger a significant bullish move.
A golden cross formation supports that the short-term outlook for EUR/USD remains positive. This bullish signal occurs when the 50-day EMA crosses above the 200-day EMA, near the 1.0800 level. This technical setup indicates a strengthening of bullish momentum.
However, the 14-period Relative Strength Index (RSI) has fallen to the 40.00 to 60.00 range, suggesting that the bullish momentum has temporarily faded. Traders should closely monitor these technical indicators to assess the pair's next move.
The ECB's rate cut decision and inflation projections have injected optimism into the EUR/USD market, although with some caution. While the ECB's proactive measures aim to guide inflation towards the 2% target, persistent services inflation and wage growth pose challenges. The eurozone's economic recovery, reflected in positive GDP growth, adds a layer of complexity to the outlook. Technically, EUR/USD shows potential for a bullish reversal, but traders should remain attentive to market signals and economic developments.
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