Euro tumbles amid dovish ECB signals

Philip McHugh April 12th 2024 - 2 minute read

The euro fell yesterday amid ramped-up European Central Bank (ECB) interest rate cut bets.

So far this morning the pound is mixed, with GBP/EUR holding at €1.1171 and GBP/USD slumping to $1.2513. GBP/CAD is subdued at CA$1.7171, while GBP/AUD and GBP/NZD are flat at AU$1.9208 and NZ$2.0936, respectively.

Looking ahead, will the UK’s lacklustre GDP figures sour Sterling sentiment as the week draws to a close?

What’s been happening?

Thursday saw the euro slump against most major rivals as the European Central Bank struck dovish while delivering its fifth consecutive interest rate hold.

Despite maintaining the central bank’s current base rate of 4.5%, ECB President Christine Lagarde observed that it could be ‘appropriate’ for the central bank to promptly begin its unwinding cycle, as policymakers begin to favour a shift towards more accommodating monetary policy.

This encouraged investors and economists alike to dial up their interest rate expectations, with market consensus showing a weighty preference for a June rate cut.

Meanwhile, the pound traded in a wide range against its peers. Initially lifted by Bank of England (BoE) policymaker Megan Greene’s hawkish rhetoric, Sterling then retreated as investors anticipated the UK’s upcoming GDP print.

Elsewhere, the US dollar wavered close to a five-month high as deferred Federal Reserve interest rate cut bets buoyed the safe-haven ‘greenback’ against its peers.

Expectations that the Fed will be amongst the last of the major central banks to lower interest rates served to preserve USD’s recent winning streak.

What’s coming up?

Turning to today’s session, the pound could endure volatile trade following the UK’s latest GDP report.

Although the data showed that January’s growth was revised up from 0.2% to 0.3%, it also revealed that growth slowed to just 0.1% in February as the economy remains fragile.

Signs of economic stagnation could prompt another rise in BoE rate cut bets, as persistently high interest rates stifle UK growth. This may leave Sterling on the defensive as the session progresses.

Meanwhile, Germany’s latest inflation rate printed as forecast, cooling to 2.2% in March from 2.5%. The euro may struggle to attract support today amid easing German inflation, as yesterday’s dovish signals from the ECB continue to weigh on the common currency.

Elsewhere, speeches from Federal Reserve policymakers could imbue USD exchange rates with additional volatility. Fed hawk Raphael Bostic will speak this evening, followed by his more neutral colleague Mary Daly.

Written by
Philip McHugh

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