Euro Rises to $1.086 but Faces Third Consecutive Weekly Decline

The euro gained to $1.086 on Friday but is set to close its third straight weekly decline, as expectations of further European Central Bank (ECB) rate cuts intensified. Despite the brief rise, the currency has struggled in recent weeks due to worsening economic prospects for the eurozone and growing certainty that the ECB will continue its rate-cutting cycle well into 2025.

ECB Rate Cuts Anticipated Amid Weakening Eurozone Outlook

This week, the European Central Bank announced its third rate cut of the year, aiming to bolster the economy while keeping inflation under control. However, ECB President Christine Lagarde's comments following the decision signaled a downgrade of the eurozone’s economic outlook, with key indicators suggesting slower growth and potentially deeper challenges ahead.

Money markets have responded by pricing in at least a 25 basis point (bps) rate cut in December, with a 25% chance that the ECB could take a more aggressive stance and deliver a 50 bps cut. Investors now expect additional 25 bps cuts at every ECB meeting until mid-2025.

The growing likelihood of more accommodative monetary policy in the eurozone has weighed on the euro, causing it to underperform against major currencies, especially the US dollar.

ECB Balances Inflation Control and Economic Growth

The ECB’s decision to cut rates reflects its efforts to navigate between controlling inflation and supporting a slowing economy. The bank has made significant progress in curbing inflationary pressures, but the overall economic outlook has worsened, driven by factors such as declining consumer demand and weak manufacturing activity. The eurozone has been grappling with a range of challenges, from energy prices to the lingering effects of supply chain disruptions and geopolitical tensions.

With Christine Lagarde emphasizing the need for continued support, the ECB appears poised to maintain its dovish stance well into 2025. However, with inflation still above the ECB’s 2% target, the bank will likely tread cautiously.

US Economic Strength Limits Dollar Weakness

In contrast to the eurozone, US economic data has consistently surprised to the upside. Robust retail sales in September, along with strong jobs and inflation reports, have underscored the strength of the US consumer and limited the urgency for aggressive Federal Reserve rate cuts. As a result, expectations for rate cuts by the Fed have diminished, providing support for the US dollar and keeping pressure on the euro.

While the euro has risen slightly, the broader economic divergence between the eurozone and the US has contributed to the euro’s relatively poor performance in recent weeks. The EUR/USD exchange rate is likely to remain influenced by these contrasting monetary policies and economic trajectories.

Outlook for the Euro

The outlook for the euro remains closely tied to the ECB’s policy decisions and the broader eurozone economic landscape. As long as the ECB continues to signal further rate cuts and the eurozone economy struggles to gain momentum, the euro is expected to face challenges in gaining sustained upward traction.

In the coming months, attention will focus on upcoming ECB meetings and key economic data releases from the eurozone, including indicators for growth, inflation, and employment. Any shifts in the ECB’s policy stance or signs of economic recovery could influence the euro’s performance against major currencies.

Conclusion

As the euro rises to $1.086 but heads for its third weekly decline, markets remain focused on the European Central Bank’s policy decisions and the deteriorating economic outlook for the eurozone. The increased likelihood of further ECB rate cuts contrasts sharply with the Federal Reserve’s more cautious approach, supporting the US dollar and keeping pressure on the euro.

Join our Trading with CA Abhay Telegram Channel for regular Stock Market Trading and Investment Calls by CA Abhay Varn - SEBI Registered Research Analyst & Finance Saathi Telegram Channel for Regular Share Market, News & IPO Updates.

Start your Stock Market Journey and Apply in IPO by Opening Free Demat Account in Choice Broking FinX.

For more insights into the latest IPOs and stock trading news, visit our sections on Best IPO to Apply Now - IPO List 2024, Latest IPO, Upcoming IPO, Recent IPO News, Live IPO GMP Today - Finance Saathi and explore the Top News Headlines - Share Market News, Latest IPO News, Business News, Economy News - Finance Saathi.