The euro is calm on Wednesday after an impressive 3-day rally which saw EUR/USD jump 1.4%. Will the upswing continue? In the European session, EUR/USD is trading at 1.1220 at the time of writing, down 0.08% on the day.
ECB likely to lower rates in September despite stubborn inflation
The European Central Bank took the plunge and lowered interest rates in June, for the first time in four since 2019. This brought down the key rate to 3.75%, down from a record 4%. At the meeting, the ECB also revised upwards its inflation forecast for 2024 from 2.3% to 2.5%.
The ECB remains concerned about sticky inflation which is above the 2% target. The fact that inflation is above target won’t stop the central bank from further cuts since rate moves tend to take time until they filter through the economy. The ECB wants to continue cutting rates in order to boost a flagging eurozone economy but sticky inflation and strong wage growth remain are making it more difficult for the ECB to lower rates. Still, the markets have priced in a rate cut at the September 12 meeting at around 90%.
Next up: Jackson Hole Symposium
The annual meeting at Jackson Hole could be dramatic. Federal Reserve Chair Powell will address the gathering on Friday, ahead of a widely expected Fed rate cut next month. It is practically a given that the Fed will loosen policy, but by how much?
The most likely scenario is a quarter-point cut, but earlier this month, the financial markets were routed and expectations for a large half-point cut soared. With inflation under control, the Fed is keeping a close eye on the US labor market, and Powell’s take on the economic outlook could move the markets.
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EUR/USD Technical
- EUR/USD is testing support at 1.1112. Below, there is support at 1.1090
- 1.1151 and 1.1173 are the next resistance lines
