Euro Sharpens continued its downward trajectory against a basket of major currencies, marking its third consecutive session of losses against the US dollar and hitting a five-week low. The currency moved away from the psychological level of $1.08 amidst growing concerns about the interest rate differential between Europe and the US.
Recent statements from European Central Bank (ECB) officials further fueled expectations of an interest rate cut in June, contrasting with remarks from Federal Reserve official Christopher Waller, which dampened prospects of a US rate cut in the same period.
EUR/USD
The EUR/USD pair declined by 0.3% to 1.0893, reaching its lowest level since February 21. This decline followed a 0.1% loss on Wednesday, marking the second consecutive session of decline.
Bearish Remarks
Key figures from the ECB highlighted the need for monetary stimulus, citing concerns about inflation and wage growth. Latvian Central Bank Governor Mārtiņš Kazāks emphasized a decline in inflation, suggesting that June could be an opportune time to commence interest rate cuts. Similarly, Italian Central Bank Governor and ECB member Fabio Benita indicated a forthcoming move towards rate cuts as inflation approaches the 2% target. ECB Chief Economist Philip Lane echoed these sentiments, expressing confidence in the normalization of European wage growth and paving the way for potential rate cuts.
European Rates
The dovish tone from ECB officials bolstered expectations of an interest rate cut in June, with investors now pricing in a total of 90 basis points in rate reductions by the ECB throughout the year.
Waller’s Remarks
In contrast, Federal Reserve member Christopher Waller struck a more cautious tone, suggesting that there is no urgency to implement rate cuts. He emphasized the need to monitor inflation trends over the coming months before considering any adjustments to monetary policy. Waller’s remarks led to a revision in market expectations, with the likelihood of a 0.25% US interest rate cut in June declining from 72% to 60%.
Interest Rate Gap
The interest rate differential between the eurozone and the US currently stands at 100 basis points in favor of the US. However, if the ECB proceeds with rate cuts in June while the Fed maintains its stance, this gap could widen to 125 basis points, further weakening the Euro.
In summary, the Euro Sharpens decline to a five-week low reflects growing concerns about the widening interest rate gap between Europe and the US, fueled by contrasting monetary policy outlooks from ECB and Fed officials.