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6 June 2024 | FXGT.com

Euro Strengthens Ahead of Anticipated ECB Rate Cut

Euro Reaches 2-Month Highs: The euro is trading just below the $1.09 resistance level, close to its highest level in two months, as traders anticipate a rate cut by the European Central Bank (ECB) later today.

Market Drivers: The euro’s recent strength against the dollar has been influenced by reduced expectations of further significant rate cuts by the ECB this year, alongside increased bets on US monetary easing. Today’s focus will be on the ECB’s communication regarding future easing and inflation risks.

Expected Rate Cut: The ECB is widely expected to deliver a 25-basis point cut in its three key borrowing rates, marking the first such move since 2016. This cut would be significant, as it responds to easing inflation pressures rather than a financial crisis.

ECB Future Rate Cut Speculation: Market bets on additional cuts this year have been significantly reduced, especially after inflation accelerated to 2.6% in May and economic and wage growth exceeded expectations. While today’s interest rate cut is highly expected, the ECB has been vague on the timeline for additional cuts, indicating that any further cuts this year will depend on the data.

US Economic Data: The US ISM Services PMI report for May indicated strong performance, jumping to 53.8 from the previous 49.4. However, easing labour market conditions, as shown by lower-than-expected US JOLTS Job Openings and ADP Employment Change data, have increased expectations for a Fed rate cut in September. The CME FedWatch tool now shows a 68% chance of a rate cut in September, up from 50% a week ago.

Upcoming US NFP Data: Following the EBC decision today, investors will turn their focus to the US Nonfarm Payrolls (NFP) data for May, due on Friday. The report is expected to show that employers hired 185,000 new employees, up from the previous 175,000. The US employment data will be crucial in shaping future US monetary policy expectations.

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