By Emma Bonnet On Jun 6, 2024 4 minutes

EUR/USD Up On ECB’s 25 BPS Rate Reduction

ECB Rate Cut: ECB Lowered The Main Refinancing Rate To 4.25% And Deposit Facility Rate To 3.75%, Aligning With Market Expectations.
Inflation Projections: ECB forecasts core inflation at 2.8% for 2024, 2.2% for 2025, and 2.0% for 2026.
Economic Growth: Eurozone GDP grew by 0.3% in Q1 2024, indicating a recovering economy.

In Thursday’s early New York session, the EUR/USD pair experienced a notable rise as the European Central Bank (ECB) announced a reduction in its key interest rates by 25 basis points (bps). Market participants widely anticipated this policy decision, and has significant implications for the Eurozone’s economic landscape. The ECB’s move to cut rates aims to navigate inflation back towards its target, providing a mixed yet hopeful outlook for traders and investors.

ECB’s Policy Decision And Rate Reductions

The ECB’s decision to lower the Main Refinancing Operations Rate to 4.25% and the Deposit Facility Rate to 3.75% aligns 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 released 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 policymakers had signalled their intention to reduce borrowing rates by 25 bps, confident that inflation will return to the desired 2% target. This decision underscores the ECB’s proactive approach to addressing inflationary pressures and supporting economic growth.

Inflation And Economic Outlook

The journey towards achieving the 2% inflation target appears challenging due to persistently high service inflation. This inflationary pressure is significantly influenced by wage growth and an improved economic outlook for the Eurozone. Service inflation rose to 4.1% in May, marking the highest level in seven months. This surge is partly driven by wage increases, contributing to the overall inflationary environment.

In addition to inflation dynamics, the Eurozone’s economic performance has shown signs of resilience. The Gross Domestic Product (GDP) grew by 0.3% in the first quarter of 2024, following two consecutive quarters of contraction in 2023. This growth indicates a recovering economy bolstered by the ECB’s accommodative policies.

Interest Rate Outlook And Market Expectations

Looking ahead, the ECB is expected to maintain a data-dependent stance on future interest rate decisions. Officials are unlikely to commit to further rate cuts in the near term, including the upcoming July meeting. Financial markets, however, anticipate that the ECB might 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 timeframe, suggesting a potential bullish reversal. A break above the neckline, marked at the April 9 high of 1.0885, could trigger a significant upward movement.

A golden cross formation supports the near-term outlook for EUR/USD remains positive. This bullish signal occurs when the 50-day Exponential Moving Average (EMA) crosses above the 200-day EMA, near the 1.0800 level. This technical setup indicates a strengthening upward momentum.

However, the 14-period Relative Strength Index (RSI) has slipped into the 40.00-60.00 range, suggesting that the bullish momentum has temporarily faded. Traders should monitor these technical indicators closely to gauge the pair’s next move.

The ECB’s rate cut decision and inflation projections have injected optimism into the EUR/USD market, albeit with some caution. While the ECB’s proactive measures aim to steer inflation towards the 2% target, persistent service 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 vigilant of market signals and economic developments.