Ella 
EUR/USD gave up early losses and will close just below the 1.1100 mark, little changed this week. The pair bottomed at 1.1001 mid-week as the US Dollar (USD) benefited from the risk-off environment. On Thursday, the dollar finally gave up its early gains after the European Central Bank (ECB) released monetary policy and U.S. inflation data.
The European Central Bank cut its deposit facility rate by 25 basis points to 3.5% as scheduled, but also lowered its marginal lending facility rate and main refinancing operation rate by 60 basis points. Although not mentioned directly, weak economic growth in the euro zone was one of the main reasons for the decision.
European Central Bank President Christine Lagarde acknowledged the bleak picture to some extent, noting that the economic recovery still faces some headwinds and policymakers also see the risk of rising inflation. As a result, ECB officials have said they will keep policy rates sufficiently restrained for as long as necessary to achieve this goal. Finally, Lagarde reiterated that the central bank will continue to make decisions on a meeting-by-meeting basis and that its decisions will depend on data.
The ECB’s statement was basically in line with market expectations and had a limited impact on the euro (EUR). EUR/USD moves higher on dismal US data.
The United States released its Consumer Price Index (CPI) on Wednesday. The U.S. Bureau of Labor Statistics reported that the U.S. Consumer Price Index (CPI) rose at an annual rate of 2.5% in August from a year earlier, down from the previous reading of 2.9%. Additionally, the core annual rate came in at 3.2%, in line with July’s data and expectations. However, the monthly core gain was higher than expected at 0.3%.
On Thursday, the United States released the producer price index (PPI) for the month, which increased by 1.7% year-on-year, lower than the expected 1.8% and the previous value of 2.1%. On a monthly basis, PPI rose 0.2%, slightly above expectations of 0.1%.
The data wiped out hopes of a 50 basis point (bps) interest rate cut by the Federal Reserve (Fed) at next week’s meeting. The Fed is likely to cut interest rates slightly by 25 basis points, a rate cut that has long been priced in by the market.
The U.S. central bank is expected to not only cut interest rates but also release a new Summary of Economic Projections (SEP), or dot plot. The document anticipates policymakers’ views on economic growth, inflation and employment over the next few years, as well as their intentions for interest rate changes. The last SEP, released in June, showed policymakers intended to cut interest rates by just 25 basis points this year. Revisions to this figure could be a game changer. The deeper the intended cuts, the more likely the dollar will be affected.
The dollar could also take a hit if the Fed surprises with a 50 basis point rate cut at its September meeting.
The reason for extending the rate cut is economic progress. Although the U.S. economy is in far better shape than its major rivals, concerns about a soft landing remain. At this time, using the word “recession” may be an overstatement.
Still, while inflation remains above the Fed’s 2% target, the economy has struggled long enough to stay that way. It’s time for America to regroup.
The Fed won’t be the only central bank taking the stage in the coming days. The Bank of England (BoE) and the Bank of Japan (BoJ) will also announce monetary policy decisions next Thursday and next Friday respectively, which may affect the dollar through market sentiment.
The US is due to release August retail sales ahead of the Federal Open Market Committee (FOMC) announcement, while the Eurozone is due to release the final estimate of August’s Harmonized Index of Consumer Prices (HICP) and September’s consumer confidence index. Germany is due to release the ZEW Economic Sentiment Survey for September and the Producer Price Index (PPI) for August.
