EUR/USD Doesn’t Let Go of 1.05 After Dovish ECB 25 bps Rate Cut
EUR/USD has been moving above and below the 1.05 level, but it keeps returning to it and nothing seems to be able to send it either way, which shows uncertainty.
Today the European Central Bank delivered a 25 basis points rate cut as anticipated, while president Lagarde also sounded dovish. The GDP and inflation projection were revised lower too, which sent the Euro around 50 pips lower initially, but it came back up in no time.
The ECB has updated its economic forecasts, projecting slower growth for the euro area. Growth expectations are now set at 0.7% for 2024, 1.1% for 2025, 1.4% for 2026, and 1.3% for 2027. These figures represent a more cautious outlook compared to the projections from the last ECB meeting, which estimated growth at 0.8% for 2024, 1.3% for 2025, and 1.5% for 2026.
The downward revisions in inflation forecasts also strengthen the case for further rate cuts next year. Core inflation is now predicted to average 2.9% in 2024, 2.3% in 2025, and 1.9% in 2026, compared to September’s estimates of 2.9%, 2.3%, and 2.0% for the same years. The ECB’s acknowledgment that rates are no longer in a “sufficiently restrictive” territory marks a significant shift in its policy tone.
This admission is evident from the removal of the statement: “It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim.” Under its data-dependent framework, the ECB appears poised to continue lowering rates, provided economic conditions remain weak and the outlook justifies further easing.
Lagarde Q&A Highlights
Rate Discussions:
- Some discussions considered a 50 bps cut.
- Direction of rate changes is clear, but the pace remains uncertain.
- ECB has already cut rates by 100 bps.
- Neutral rate level was not discussed in the meeting but will be debated later.
Economic Outlook:
- Growth momentum is slowing.
- Exports remain weak.
- Firms are delaying investments.
- Surveys indicate fewer jobs being created this quarter.
- Economic strengthening expected over time but at a slower pace than earlier projections.
Inflation Insights:
- Inflation is projected to converge to the 2% target by 2025 (six projections in a row).
- Risks to inflation are now two-sided.
- Past shocks have contributed to inflation decline.
- Variations in the exchange rate impact inflation, and ECB is monitoring this.
Market and Projections:
- Tariffs are not included in ECB projections.
- Market pricing of rate hikes is not a focus for Lagarde.
- Other Notes:
- Productivity shows more promising signs.
EUR/USD Live Chart
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