EUR/USD: Euro May Fall as the ECB Begins Rate Cut Countdown
EUR/USD: Euro May Fall as the ECB Begins Rate Cut Countdown
By:Ilya Spivak
The euro may be set to fall as the European Central Bank begins to lay the groundwork for interest rate cuts
- Euro lifted as the Fed Chair Powell talks down the U.S. dollar.
- All eyes now turn to the ECB monetary policy announcement.
- Stage-setting for interest rate cuts may push the euro lower.
The euro caught a lift as the U.S. dollar traded broadly lower against its major counterparts.
Pressure began to build as the private-sector U.S. jobs growth estimate from ADP undershot expectations, showing payrolls increased by 140,000 in February. Economists penciled in a slightly higher 150,000 rise before the release. A larger nudge came courtesy of Fed Chair Jerome Powell.
Fed Chair Powell wounds long rates, U.S. dollar
The central bank chief sat for the first of two days of testimony in Congress, with markets anxiously awaiting any policy signals that might alter near-term rate cut bets, Powell managed to walk a fine line between reiterating that easing is likely to come this year while warning that more evidence is needed before stimulus can come.
That kept the 2024 policy outlook priced into Fed funds futures pinned in a tight range of 75-80 basis points (bps) in cuts. However, longer-dated Treasury yields slumped as Powell said that “if the economy evolves as we hope, interest rates will need to come down significantly over the coming years.” The greenback felt the sting.
The euro will have to show some of its own initiative from here as the spotlight turns to a monetary policy announcement from the European Central Bank (ECB). The benchmark deposit rate is expected to remain unchanged at 4%, putting the spotlight on updated economic forecasts and the post-meeting press conference with President Christine Lagarde.
Euro at risk if the ECB starts stage-setting for rate cuts
As it stands, three 25 bps cuts are fully priced in to appear by June, September, and December. A total of 85 bps in easing for 2024 is reflected in benchmark euro short-term rate (ESTR) futures, implying a 60% probability of a fourth reduction by year-end. This means that officials may feel it prudent to begin laying the rhetorical groundwork for a policy pivot.
The requisite ingredients seem to be in place. Headline price growth is cooling and German’s two-year breakeven rate – a gauge of inflation expectations in the bond markets – has stabilized below the ECB target of 2%. Meanwhile, purchasing managers index (PMI) data signals economic activity has contracted for nine months straight.
So far, the ECB has resisted market pressure to publicly own the rate cut timeline envisioned by investors. It signaled the end of tightening late last year, but most officials including Lagarde have reiterated a “higher for longer” narrative, implying easing is far off on the horizon. If they begin to change their tune, the euro is set to suffer.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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