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EUR/USD: Rally stalls as ECB rate cut bets rise, Eurozone CPI eyed

  • Euro's upward momentum has weakened on dovish ECB expectations. 
  • Markets think the central bank would cut rates by 10 basis points next week. 
  • A below-forecast Eurozone inflation would bolster the rate cut expectations, sending the EUR lower. 

The upside in EUR/USD looks to have stalled with markets pricing higher odds of a European Central Bank (ECB) rate cut next week. 

The pair is currently sidelined near 1.1135, having faced rejection at 1.1185 on Monday. 

Markets price in ECB rate cut

“Fiscal policy is the correct answer. we should not get confused. when you have a problem, you can’t always look at central banks," ECB's Vice Chairman Luis De Guindos said Monday while discussing the impact of the coronavirus outbreak. 

While De Guidos put the onus on government, markets increased bets on interest rate cuts. 

Currently, money markets are pricing a greater than 90% chance that the ECB will lower its deposit rate by 10 basis points next week, and a total of 20 basis points by the end of the year, according to Bloomberg. 

ECB's deposit rate currently stands at -0.5%, the lowest on record. As a result, many economists think the bank has no room left for further easing. Also, there is general consensus that the threat posed by the virus to the economy cannot be fixed through rate cuts. 

Even so, the rate cut bets have risen and expectations may increase further if the Eurozone consumer price index (CPI) for February prints below the forecast for a 1.2% rise, drifting further away from the goal of just under 2%.

In that case, sellers could attempt to push the spot below the former resistance-turned-support of the 200-day average at 1.1095. Alternatively, if the data betters estimates, EUR/USD could revisit Monday's high of 1.1085. 

Apart from the inflation number, the focus will be on the Group of Seven phone call, which is scheduled to happen at 12:00 GMT. ECB's President Lagarde may join the conference but has no scheduled appearances before next week’s meeting.

Technical levels

 

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