ECB cuts rates for first time in 5 years, says it is “not committed to any particular rate-path”

The big news today is the European Central Bank’s first cut in interest rates in almost 5 years. While the EUR/USD ticked up as the decision was announced, it’s important to note that the rate cut was fully priced in by the markets. Traders will be studying the post-decision press conference closely for clues as to how aggressive the ECB’s future easing will be, but the statement accompanying the decision noted that the ECN was “not committed to any particular rate-path.”

Inflation across the bloc has fallen close to the 2% target in 2024, but recent weeks have shown an acceleration in price growth—with May’s inflation coming in at 2.6% vs. 2.4% in April. The labour market has also remained strong, putting pressure on wage growth, and the manufacturing and service sectors are showing signs of life after a difficult start to the year.

Most market analysts believe that ECB President Christine Lagarde will not be in any rush to cut rates further. “They are cutting into an improving situation, rather than a deteriorating one,” said Paul Hollingsworth, chief European economist at BNP Paribas. “This means they will be in no rush to cut rates further, which makes another cut in July unlikely and steers them towards only cutting once every quarter.”

The situation in the US complicates matters further. Over the last 18 months, the US economy has powered through the oppressively high interest rates held by the Federal Reserve, forcing many analysts to scale back expectations of a rate cut. But last week’s jobs data showed signs that the economy might finally be slowing down, with both job openings and private sector unemployment falling.

The chances of a US rate cut in September have fluctuated wildly over the last few months. In the early spring, it was seen as almost impossible, but optimism has slowly risen, and after the latest round of data, the chances stand at 57%.

So, the ECB rate cut should favour a stronger USD in the short term, but if the US economy continues to show signs of a slowdown, increasing the chances of a September rate cut, we could see a ranging market—much as we’ve seen over the last month. With the NFP due tomorrow, confirmation of further slowing may not be far away.

Importantly, any signs that the ECB is considering a more aggressive cycle of cuts could spark some serious volatility, with the USD sure to gain strength over the summer. This is unlikely though, as the ECB will be wary of moving too far out of sync with the Federal Reserve. The dangers of imported inflation far outweigh any gains a weaker currency might have.

Technical Analysis

Following the softer data out of the US on Monday, which helped the EUR/USD head higher, the pair retraced before again heading towards the 1.0900 level on Thursday.

Having formed an inverted head and shoulders pattern, the pair looks set to continue its upward trajectory should the price break above the neckline.

The Exponential Moving Averages (EMAs) confirm this bias, having formed a golden cross (the term used to describe a shorter moving average crossing above a longer moving average) early last week, and with price sitting above all three EMAs.

The RSI is also poised for near-term upside moves, with a reading of 59 and what appears to be increasing momentum.

Should the price break above the 1.0900 level, the March 21 high of 1.0950 will be the price to watch, and after that, the 1.1000 psychological handle. On the downside, a move lower than 1.0800, the current level of the 200-day EMA could see further bearish moves.