ECB’s Triple Rate Cut: Fighting Inflation and Sluggish Growth as EURUSD Downtrend Deepens

The European Central Bank (ECB) is facing a challenging economic landscape, marked by falling inflation and sluggish growth in the eurozone. In response, the ECB implemented its third consecutive rate cut to stimulate the economy, lowering key rates by 25 basis points. Inflation dropped to 1.7% in September, below the ECB’s 2% target for the first time in three years, largely due to declining energy prices. Meanwhile, the eurozone’s economic growth remains weak, with a 0.2% growth rate predicted for the third quarter. These developments have also impacted the EURUSD, which is experiencing intensified bearish momentum driven by technical and fundamental factors, signaling further downside risk for the currency pair.

The European Central Bank (ECB) implemented its third consecutive interest rate cut on Thursday, lowering key rates by 25 basis points. The main refinancing rate is now set at 3.40%, the marginal lending facility at 3.65%, and the deposit facility at 3.25%. The decision comes amid falling inflation, which dipped to 1.7% in September, below the ECB’s 2% target for the first time in three years, primarily due to lower energy prices. However, core inflation remains stubborn at 2.7%. With eurozone growth stagnating, predicted at 0.2% for the third quarter, the rate cut aims to stimulate spending and support the slowing economy.

Inflation in the eurozone fell to 1.7% in September, down from 2.2% in August, marking the first time inflation dropped below the ECB’s 2% target in three years. This decline was largely driven by falling energy prices, though core inflation, excluding energy and food, remained at 2.7%. Services inflation remains high at 3.9% year-on-year. Economists expect inflation to stay around 2% for the remainder of 2024. ECB President Christine Lagarde expressed confidence that inflation will return to target, considering these developments in upcoming policy decisions.

The eurozone’s economic stagnation contributed to the ECB’s decision to cut rates, aiming to stimulate spending amid weak growth. The second quarter of 2024 saw just 0.2% growth, revised down from 0.3%, due to sluggish consumption and investment. Growth is expected to remain at 0.2% for the third quarter, with the ECB downgrading its 2024 growth forecast to 0.8% and 2025 to 1.3%. The HCOB Eurozone Composite PMI indicated a contraction in private sector activity, while Germany’s economy is predicted to shrink by 0.2% in 2024. The ECB’s rate cut follows a similar move by the US Federal Reserve.

EURUSD has been steadily decreasing after reaching a peak at 1.12134 on September 25. This decline has been influenced by both fundamental and technical factors. The pair’s drop below the 50-period Exponential Moving Average (EMA) has strengthened the bearish trend, suggesting the possibility of further declines. The significant drop below the crucial support level at 1.10020 was a major contributor to the downward movement, paving the way for additional losses. Additionally, the formation of a “Death Cross” double crossover intensified the downward momentum. Furthermore, the Momentum oscillator falling below 100 and the Relative Strength Index (RSI) remaining below 50 indicate ongoing selling pressure. These combined technical signals indicate that EURUSD is likely to face continued downside risk in the short term. Traders may focus their attention on the following downside targets if the sellers’ pressure persists: 1.07764, 1.06572, and 1.03137.

In conclusion, the ECB’s response to a weakening eurozone economy, marked by falling inflation and stagnating growth, has been a series of rate cuts aimed at stimulating spending. While inflation has dropped below the ECB’s target for the first time in three years, core inflation and sluggish economic activity remain concerns. These developments, alongside intensified bearish pressure on the EURUSD, signal continued challenges for the eurozone. Traders and policymakers alike will closely monitor upcoming economic data and market trends to assess the impact of these measures.