Euro trades above $1.09 for first time since March

The European Central Bank is preparing to cut interest rates for the first time since 2024, and the chances of additional European interest rate cuts this year are receding.

The euro rose in the European market on Tuesday against a basket of global currencies, extending its gains for the fourth consecutive day against the US dollar, exceeding the $1.09 barrier, recording its highest level in three months, due to renewed hopes of narrowing the interest rate gap between Europe and the United States before the end of this year.

The European Central Bank is set to cut interest rates this week for the first time since 2014, in the first steps toward easing monetary policy in Europe. But the move will not come as quickly as previously expected.

With inflation accelerating again in Europe in May, inflationary pressures on European monetary policymakers have been renewed, and the prospects of further interest rate cuts in the eurozone this year have receded.

In contrast, the chances of the Federal Reserve making at least two cuts in US interest rates in September and November have increased, especially after a series of weak data recently in the United States.

Price overview

Euro exchange rate today:

The euro rose against the dollar by more than 0.1% to ($1.0916), the highest since March 21, from the opening price of ($1.0904), and recorded a low of ($1.0899).

The euro ended Monday's trading up 0.55% against the dollar, in its third consecutive daily gain, and its biggest gain since May 15, thanks to a decline in US yields after the release of weak data in the United States. European interest rates: Inflation data released late last week in Europe reduced the chances of additional European interest rate cuts this year. Markets have reduced the pricing of cuts from 75 basis points to less than 50 basis points this year from the European Central Bank.

US interest data showed yesterday, Monday, in the United States, a contraction for the second consecutive month in manufacturing activity and an unexpected decline in construction spending during May, in the latest data indicating a slowdown in the US economy during the second quarter of this year.

Following the data, and according to the Chicago Mercantile Exchange's FedWatch tool, futures pricing for a 25 basis point cut in September rose from 53% to 60%, and for a cut in November from 66% to 72%.

Interest rate gapThe interest rate gap between Europe and the US is currently at 100 basis points, the smallest gap since May 2022, and is expected to widen to 125 basis points this week in favour of US rates.

Given the current odds on European and US interest rates, the gap is expected to narrow again to 100 basis points in September and then to 75 points in November, which would favour a rise in the euro against the US dollar.

The European Central Bank will hold its monetary policy meeting next Wednesday, with decisions due on Thursday, with European interest rates widely expected to be cut by 25 basis points, the first cut in European interest rates since 2014.

The European Central Bank, led by Christine Lagarde, is likely to provide new guidance and evidence on possible further cuts in European interest rates, in light of recent economic developments in the eurozone, especially the acceleration of inflation again in Europe last month.

Euro outlook: UBS economist Dominic Schneider: The big event this week is the ECB meeting, with interest rate cuts well expected, so guidance on future policy moves will be a key driver. We think the euro will weaken, especially given its strong rally in recent weeks.

Schneider explained: If the ECB allows some time before any further rate cuts, the euro will rise as euro zone bond yields rise compared to US yields, potentially sending the euro against the dollar above $1.09.

Schneider added: If the US labor market data is weak this week, markets may increase the probability of the Federal Reserve cutting interest rates for the first time in July, which would weaken the US dollar further.Technical viewEuro-dollar price breaks resistance - Today's forecast 04-06-2024