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Euro US Dollar (EUR/USD) Quiet ahead of ECB Interest Rate Decision

A US Dollar bill.

Euro US Dollar (EUR/USD) Wavers ahead of Monetary Policy Update

The Euro US Dollar (EUR/USD) exchange rate is moving without a clear trajectory this morning ahead of the European Central Bank’s hotly anticipated interest rate decision due later today.

At the time of writing the EUR/USD exchange rate is trading at $1.0888, virtually unchanged from this morning’s opening rate.         

Euro (EUR) Muted ahead of ECB Decision

The Euro (EUR) is trading without a clear direction this morning as investors appear reluctant to place any aggressive bets on the common currency ahead of the ECB’s vital interest rate decision, due this afternoon.

While the central bank has repeatedly pushed back against interest rate cuts in recent weeks, advocating a ‘higher for longer’ stance towards monetary policy, markets continue to speculate that interest rate cuts may be necessary in the first half of the year.

Davide Oneglia, senior economist at TS Lombard, commented:

‘Having overlooked the negative impact of monetary tightening on growth until now, the ECB remains biased towards cutting too little, too late. The ECB has less to worry about inflation and fewer excuses to keep monetary policy tight than officials think, but over-tightening habits die hard.’

As inflation within the Eurozone continues to cool, wavering close to the ECB’s 2% target, investors are growing increasingly expectant of a more dovish approach towards monetary policy in the coming months.

Also serving to limit EUR’s upside potential this morning is the latest Ifo business climate data for January, which unexpectedly slumped to 85.2, rather than rising to 86.7. Used to gauge the sentiment of business across Germany, a second consecutive decline appears to be dampening investor interest in the Euro today, ahead of this afternoon’s vital monetary policy data.

US Dollar (USD) Quiet ahead of GDP Data

The US Dollar (USD) is rangebound this morning ahead of impactful US data releases, due for release this afternoon.

In the wake of yesterday’s upbeat PMI data, investors stand hesitant to place aggressive bets on USD ahead of further supporting economic data. Amid market expectations of a March rate cut, expansion in the private sectors pointed to rapidly cooling US inflation, serving to reinforce speculations of imminent Fed rate cuts.

Chris Williamson, Chief Business Economist, at S&P Global Market Intelligence commented:

‘With the survey indicating that supply delays have intensified while labour markets remain tight, cost pressures will need to be monitored closely in the coming months, but for now the survey send a clear and welcome message of resilient economic growth and sharply waning inflation.’

Investors now await the latest economic reports, for further signs that the Fed is well on its way to cutting interest rates.

Euro US Dollar exchange rate forecast: ECB to Maintain Hawkish Stance?

Looking ahead, the core catalyst of movement today will be the ECB’s interest rate decision. Should rate setters enact a dovish hold, the Euro may slump amid the increasingly likelihood of cuts. However, should policymakers continue to advocate their increasingly hawkish rhetoric towards monetary policy, markets may resize excitations of ECB rate cuts in the first half of the year.

An accompanying press conference and a speech from ECB President Christine Lagarde may drive further EUR movement, should the central bank continue to push for tight monetary policy.

In the US, the most impactful data release will likely be the latest US GDP data. Economists expect 2% growth in the fourth quarter of 2023, significantly declining from the previous quarter’s reading of 4.9%. This may see market expectations of a March rate cut soar, as the Fed tries boost economic activity.