The EUR/USD pair experienced a slight uptick near 1.0875 in the early Asian trading session on Thursday amidst speculation surrounding the European Central Bank (ECB) interest rate decision. The ECB is expected to announce its first rate cut in five years, with a projected reduction of 25 basis points. This decision would bring the main refinancing, marginal lending, and deposit rates to 4.25%, 4.50%, and 3.75%, respectively.
The financial markets have already factored in approximately 43 basis points of ECB cuts by September, with expectations of further cuts by the end of the year. The potential divergence between the monetary policies of the ECB and the US Federal Reserve (Fed) could lead to selling pressure on the Euro (EUR) and create headwinds for the EUR/USD pair. This divergence is driven by growing speculation about rate cuts from the Fed in September, as the US economy exhibited slower growth in the first quarter.
Despite speculations of a Fed rate cut, the release of the US ISM Services Purchasing Managers Index (PMI) data for May showed a positive outcome. The PMI rose to 53.8, surpassing market expectations and indicating growth in the US services sector. This unexpected strength in the US economy has provided some support to the US Dollar (USD).
Traders are now pricing in a 70% probability of a Fed rate cut in September, reflecting a significant increase from earlier predictions. This anticipation is likely to weigh on the Greenback in the short term, as investors await the US Nonfarm Payrolls (NFP) data scheduled for release on Friday. The NFP data is expected to provide insights into the health of the US labor market, with projections indicating an addition of 185K jobs in May.
The upcoming decisions by the ECB and the Fed are poised to have a substantial impact on the EUR/USD pair. The potential rate cuts by both central banks could lead to increased volatility in the currency markets, as traders adjust their positions in response to changing monetary policies. The EUR/USD pair will continue to be influenced by economic data releases and central bank decisions in the coming days, shaping the direction of the currency pair.
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