EUR/USD Recovers from Six-Month Low After ECB Rate Hike

As the week comes to a close, the EUR/USD pair has witnessed a modest rebound, reversing some of its previous day’s losses when it hit a nearly six-month low. This decline was sparked by the dovish European Central Bank (ECB) rate decision, which, despite hiking rates for the 10th consecutive time by 25 basis points to reach a historic 4%, left the impression that the policy tightening cycle might have peaked. The ECB also downgraded its forecasts for CPI and GDP growth in 2024 and 2025, casting doubt on further rate hikes and leading to speculation about a potential rate cut in the first half of 2024.

However, today’s trading session saw some buying interest in the EUR/USD pair as investors took profits on the US Dollar (USD), which had recently rallied to its highest level since March. This USD pullback was partly driven by optimism in the markets following the People’s Bank of China’s (PBoC) decision to reduce the Reserve Ratio Requirements for local lenders by 25 basis points, marking its second such move this year. This action is expected to inject more liquidity into the world’s second-largest economy and alleviate recession concerns. Additionally, China reported better-than-expected growth in Industrial Production and Retail Sales for August, further boosting market confidence.

However, it’s important to note that the EUR/USD pair’s recovery may be limited due to the possibility of further policy tightening by the Federal Reserve (Fed). The Fed is widely expected to maintain its current policy next week, but strong US economic data keeps the door open for another 25 basis points rate hike by the end of the year. Recent data from the US, including Retail Sales and the Producer Price Index (PPI), have exceeded expectations, giving the Fed room to keep interest rates elevated.

In summary, while the EUR/USD pair has seen a modest bounce, the overall sentiment suggests a bearish bias. Traders will be keeping an eye on ECB President Christine Lagarde’s upcoming speech for potential market-moving cues, and US economic releases, including the Empire State Manufacturing Index and Prelim Michigan Consumer Sentiment Index, could influence USD price dynamics. Despite the recent rebound, the EUR/USD pair remains on track for its ninth consecutive week of losses, indicating the potential for further downside movement.