EUR – Euro undermined by ECB rate cut bets

Key takeaways:  

– Euro firmed amid USD weakness 

– Falling inflation ramps up ECB rate cut bets  

– EUR monthly lows: £0.84, $1.08, AU$1.65, NZ$1.79, C$1.49 

– EUR monthly highs: £0.86, $1.12, AU$1.70, NZ$1.85, C$1.52 

The euro ended August on the defensive, undermined by cooling domestic inflation and a rise in European Central Bank (ECB) interest rate cut bets.  

However, the single currency began the month buoyed by its negative correlation with the US dollar as the latter was buffeted by weak payrolls data and US recession fears. 

Additional support was drawn from some upbeat German industrial releases. 

However, moving to the middle of the month, the common currency experienced fresh selling pressure following the publication of Germanys latest ZEW economic sentiment survey.  

The sentiment index plunged in August, falling from 41.8 to 19.2, with morale striking its lowest level in seven months. 

EUR investors were also unimpressed by the Eurozone’s latest PMI figures, dismissing the uptick in service sector activity as temporary due to the Paris Olympics. 

The euro came under additional pressure at the end of the month following soft Eurozone inflation figures. 

Headline and core inflation fell in August, with the headline figure cooling from 2.6% to 2.2%, edging closer to the ECB’s target.  

This further ramped up ECB rate cut speculation, with the data all but cementing bets that the central bank will start unwinding its monetary policy in September. 

Looking ahead, a key focus for EUR investors will unsurprisingly be the ECB’s latest interest rate decision. 

A widely expected rate cut could act as a headwind for the single currency this month, particularly if ECB President Christine Lagarde signals that further cuts will likely be needed before the end of 2024. 

EUR investors are also likely to keep a close eye on German economic releases amid growing concern over the trajectory of the Eurozone’s largest economy. Disappointing data may stoke German recession fears and apply additional pressure to the euro.