Euro down on mixed signals

The Euro edges lower on Wednesday on the back of diverging commentary from rate-setters at the US Federal Reserve (Fed) and European Central Bank (ECB).

ECB officials are now indicating a high likelihood the bank will cut interest rates in June, whilst mixed comments from Fed officials suggests a delay from the Fed is still plausible. This is causing weakness for the Euro and depressing EUR/USD, since lower interest rates tends to reduce foreign capital inflows.

On Tuesday, ECB Governing Council member Madis Muller said that “we’re closer to a point where the ECB can start cutting rates.”He added that “data may confirm the inflation trend for the ECB’s June meeting.”

Just prior to his speaking. ECB Governing Council Member Fabio Panetta said that inflation was quickly falling to target and therefore there was a "consensus emerging" for a rate cut. His views were similar to that of the Bank of Greece Governor Yannis Stournaras.

ECB Chief Economist Philip Lane said on Tuesday that wage inflation – a metric the ECB is following very closely to inform its policy – was “on track” to coming back down to normal levels.

These dovish comments follow those from the Bank of France President Francois Villeroy de Galhau, who said April could even be in the frame for a first cut. Taken together with ECB President Christine Lagarde’s comments at the last ECB policy meeting, when she said the ECB would be reviewing policy on interest rates in June, the evidence is building to a compelling conclusion.

By contrast, the Federal Reserve seems more split. Whilst Federal Reserve Chairman Jerome Powell seems to continue to advocate for a June rate cut, and the Fed’s official forecast is for three 0.25% cuts to its feds funds rate in 2024, some individual members have diverged from the official script.

On Tuesday, Federal Reserve Bank of Atlanta Governor Raphael Bostic said the Fed should take things slowly and that he now only expected one rate cut in 2024.

His view echoed those of his fellow Fed member of the board of governors Lisa Cook, who advocated for the Fed taking a “careful approach” to easing over time to “ensure inflation returns sustainably to 2.0%.”She mentioned housing inflation, which remains quite high, though her view was that it would fall on lower rental demand.

On Monday, Chicago Fed President Austan Goolsbee said the persistence of housing inflation continued to surprise him, but that he felt it would ebb away over time."The main puzzle has been about housing," Goolsbee said, a major component in the consumer spending basket that has accounted for a large share of recent headline inflation readings, according to Reuters.

In terms of US inflation, Friday’s Core Personal Consumption Expenditures (PCE) Price Index data for February, considered the Fed’s preferred gauge of inflation, is being held up as the next oracular event for determining when the Fed could cut interest rates.

A higher-than-expected inflation reading in line with most recent gauges of inflation in the US could push back further the time when the Fed is expected to cut interest rates, with negative consequences for EUR/USD.