The euro is lower on Monday. In the North American session, EUR/US is trading at 1.0806, down 0.44%.
When will ECB cut rates?
There were no surprises from the European Central Bank, which maintained the benchmark rate at 4.0% at last week’s meeting. The ECB last raised rates in September and its step rate tightening cycle is likely over. The million-dollar question is when will the central bank start to trim rates.
ECB President Christine Lagarde jumped aboard the rate-cutting bandwagon at the Davos summit, saying that a rate cut in June was likely. A day after the ECB meeting, in which it paused for a third straight time, ECB Governing Council member Francois Villeroy said, “we will cut our rates this year”. Villeroy, who heads France’s central bank, added that the ECB would need to see further progress towards its 2% inflation target before lowering rates.
The markets have widely priced in a rate cut in April and are expecting 140 basis points in cuts this year. The ECB is sounding much more cautious, with Governing Council member Martins Kazaks saying on Friday that the biggest mistake would be lowering rates too early and having to raise rates again if inflation moved higher.
In the US, the Fed has to be pleased that inflation is slowly dropping while economic growth remains solid. The US economy expanded by 3.3% in the fourth quarter, blowing past the consensus estimate of 2.0%, a sign that the economy is purring even without any rate cuts from the Fed.
On Friday, the Fed’s preferred inflation gauge, the PCE Price Index, rose 0.2% m/m in December, compared to 0.1% in November. On an annual basis, the index remained steady at 2.6%. The Core PCE Index eased to 2.9%, down from 3.2% in November.
After the Fed meeting in December, the markets were exuberant that a rate cut was coming in March, but have since slashed these expectations, as the US economy continues to churn out strong data. The odds of a quarter-point cut in March have dropped to 48%, down sharply from 72% a month ago, according to CME’s FedWatch tool.
- EUR/USD has pushed below support at 1.0851 and 1.0816. Below, there is support at 1.0778
- There is resistance at 1.0889 and 1.0924
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