Euro awaits crucial rate decision

Published on 06.06.2024 10:33

The Euro continues to hover around a 3 month low against the US dollar as we gear up to enter the European trading session while traders await the latest European Central Bank (ECB) interest rate decision and Press Conference by President Christine Lagarde will take centre stage later on today. 
The ECB is anticipated to cut its interest rates by 25 basis points (bps) at its 6 June meeting, reducing the main refinancing, the marginal lending, and the deposit rate to 4.25%, 4.50%, and 3.75%, respectively. Financial markets have priced in 43 bps of ECB cuts by September and around 60 bps by the end of the year. The divergence between the ECB and the US Federal Reserve (Fed) could exert some selling pressure on the Euro (EUR) and created a headwind for EUR/USD.  

A rate cut is by no means guaranteed and the ECB may decide to wait a little longer to see how the economy pans out and should this happen the Euro will more than likely break up through the 1.10 mark. 
Across the pond, there is growing speculation about the first-rate cuts from the Fed in September as the US economy grew at a slower pace in the first quarter. According to the CME FedWatch tool, traders are now pricing in nearly 70% odds of a Fed rate cut in September, a rise from 54.9% at the beginning of the week. The Fed rate cut expectation is likely to weigh on the Greenback in the near term.  

 There are still some doubts on rate cuts by the Fed after the release of the stronger-than-expected US ISM Services Purchasing Managers Index (PMI) data for May has provided some support to the USD. The figure rose to 53.8 in May from the previous reading of 49.4, above the market consensus of 50.8.  

Tomorrow is when the big news arrives with the release of the US Nonfarm Payrolls (NFP) data, which is estimated to add 185K jobs to the US economy in May. The stronger-than-expected US employment data might further lift the USD at the expense of the Euro and further delay a rate cut.