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Feb 08 - 09:55 AM

MUFG: Near-Term Downside Risks for EUR/USD Amid ECB and Fed Rate Cut Speculations

By eFXdata  —  Feb 08 - 09:00 AM

Synopsis:

MUFG highlights a modest downside risk for EUR/USD in the near term, attributing the currency pair's recent correction to speculations around the European Central Bank (ECB) potentially cutting rates before the Federal Reserve. The adjustment in market expectations follows stronger-than-anticipated US economic data and Federal Reserve officials' skepticism towards an imminent rate cut, now anticipated no earlier than the Fed's May meeting. In contrast, the euro-zone rate market has shown increased anticipation for an ECB rate cut possibly in April, influenced by recent ECB communications and weak economic indicators from the euro-zone, like Germany's December industrial production data.

Key Insights:

  • Market Expectations: The US rate market has adjusted the forecasted timeline for the Fed's first rate cut to May, while the euro-zone rate market hints at a potential ECB cut as early as April.

  • ECB Flexibility: Recent statements from ECB officials suggest a willingness to consider rate cuts sooner if supported by economic data, reflecting a more adaptable approach than previously indicated.

  • Economic Indicators: Weak economic performance in the euro-zone at the end of the previous year, exemplified by Germany's industrial production, contrasts with the generally more positive data emerging from the US at the start of this year.

Conclusion:

MUFG maintains a cautious outlook for EUR/USD, citing the evolving rate cut expectations for the ECB and the Fed as key factors influencing the currency pair's near-term trajectory. With the ECB possibly moving to ease monetary policy ahead of the Fed, alongside evidence of economic softness in the euro-zone, the bank sees a slight bias towards lower levels for EUR/USD in the near term.

Source:
MUFG Research/Market Commentary

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