Euro stabilizes, ECB starts talking rate cuts

The euro is steady on Friday, after sustaining sharp losses a day earlier due to the US inflation report. In the North American session, EUR/USD is trading at 1.0893, up 0.09%.

ECB members signal rate cuts coming

The European Central Bank maintained the deposit rate at 4.0% for a fourth straight time at last week’s meeting. It looks like rates have peaked but the ECB has been reluctant to signal that it is contemplating cutting rates, although the markets have priced in a first rate cut in the summer.

The ECB remains concerned about lowering rates too early and then having to zigzag on policy and raise rates if inflation starts to rise. The battle to bring eurozone inflation down to the 2% target is going well but remains unfinished, with headline inflation at 2.6% and core inflation at 3.1%.

For months, ECB policy makers have been stating that there is no rush to lower rates and warned that inflation remains a key concern. However, the winds appear to be shifting, as two ECB Governing Council members openly called for rate cuts this week.

Yammos Stournaras, head of Greece’s central bank, said that “we need to start cutting rates soon” and urged two cuts before the summer break and four during the year. Stournaras added that his stance was in line with market expectations. Olli Rehn, Governor of the Bank of Finland, said earlier on Friday that if inflation continued to drop sustainably towards the 2% target, then the ECB could slowly lower loosen policy “close to the summer”.

These comments from two senior ECB officials are a marked departure from the message the ECB has been sending and we can expect other senior officials to reiterate this dovish stance. This will likely put pressure on the euro, as lower interest rates will make the euro less attractive to investors.

EUR/USD Technical

• EUR/USD is putting pressure on resistance on 1.0907. Above, there is resistance at 1.0932
• 1.0858 and 1.0833 are providing support

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