Euro Shrugs as ECB Lowers Rates to 3.75%
The euro is drifting on Friday. EUR/USD is trading at 1.0892 in the European session, up 0.04% on the day. We could see some movement from the euro in the North American session, with the release of US nonfarm payrolls.
ECB Cuts, But No Commitments to Continue
The ECB pressed the rate-cut trigger on Thursday and cut the deposit rate by 0.25% to 3.75%. This followed five straight months of a record-high rate of 4.0%. The ECB’s steep rate-tightening cycle has slashed inflation levels but policymakers were hesitant to lower rates until yesterday, fearing that inflation could rebound after a rate cut.
The combination of lower inflation and a weak eurozone economy prodded the central bank to finally lower rates and the move was well-telegraphed. As a result, the euro showed a muted reaction with only slight gains following the rate decision.
ECB President Lagarde said at a press conference after the meeting that there was a “strong likelihood” that the rate cut was the start of “dialing back” rates, but stressed that rate decisions would be based on the data.
The central bank will most likely pause in July and the swap markets have priced in a 60% probability of a September cut. The ECB will want to monitor the effect of the rate cut on economic activity, in particular on inflation. ECB policymakers will also be keeping an eye on the Federal Reserve, which won’t be cutting before September at the earliest. The Fed usually takes the lead on rate policy and the ECB will be hesitant to continue cutting before the Fed, as this will likely weaken the euro and send inflation higher.
The US releases nonfarm payrolls on Friday and little change is expected. In April, nonfarm payrolls fell to 175,000 down sharply from 330,000 in March and its lowest level in six months. The market estimate for May is 185,000. A significant miss from the estimate could wake up the sleepy euro in the North American session.
Original Post
