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During the European session on Tuesday, EUR/USD was trading near support at the 1.0800 integer level, close to an 11-week low. The major currency pair is under pressure due to multiple headwinds including an escalating dovish bet from the European Central Bank (ECB) and a firmer US dollar (USD).
Traders have priced in another rate cut by the European Central Bank at its December meeting, amid growing risks to euro zone economic growth and inflation pressures expected to remain manageable within the central bank’s 2% target. This would mean the ECB’s fourth rate cut this year.
Germany’s producer price index (PPI) deflated 1.4% year-on-year (YoY) in September, faster than August’s 0.8%, data released on Monday showed, noting that producers were unable to raise prices for goods and services at the factory gate due to weak household spending. .
On Monday, Slovak central bank governor Peter Kazimir, a policymaker at the European Central Bank, said he was increasingly confident that deflationary trends remained intact. However, he wants to see more evidence before declaring victory over inflation.
Meanwhile, Gediminas Šimkus, governor of the Central Bank of Lithuania and member of the European Central Bank’s Governing Council, appeared to be more dovish in his comments. “If the deflationary process becomes entrenched, interest rates are likely to be below their natural level,” Shimkus said. The “natural level” of interest rates is between 2% and 3%.
Investors will be closely watching European Central Bank President Christine Lagarde’s interview with Bloomberg and her participation in a panel discussion during the International Monetary Fund (IMF) meeting in Washington on Tuesday. Lagarde is expected to provide new guidance on interest rates.
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