The European Central Bank cut all three key interest rates following its September meeting. The main refinancing rate was lowered to 3.65%, the marginal lending rate to 3.90%, and the deposit rate to 3.5%. EUR/USD traders ignored the formal outcomes of the September meeting since the central bank's decision fully matched the expectations of most experts. In particular, 64 out of 80 economists surveyed by Reuters predicted that the ECB would cut the deposit rate by 25 basis points in September. Analysts also expressed confidence that the central bank would take another step in this direction at the December meeting, thereby bringing the rate to 3.25%.
The September rate cut was preceded by a slowdown in inflation in the Eurozone. According to the latest data, the harmonized index of consumer prices fell to 2.2% y/y in August after rising to 2.6% in July. This is the weakest growth rate since August 2021. The core index also showed a downward trend, reaching 2.8% y/y after July's increase to 2.9%. This is the lowest level for this indicator in the past four months.
Amid the slowdown in inflation, many macroeconomic indicators were also disappointing: weak PMI, IFO, GfK, and Sentix indices were published during August-September. A contraction in the German economy was also recorded. All these fundamental factors contributed to strengthening dovish sentiments in the market. Therefore, the ECB made an entirely expected decision by lowering interest rates in September.
However, the central bank voiced mixed signals, preventing EUR/USD sellers from turning the results of the September meeting to their advantage. On the one hand, ECB representatives lamented the slowdown in economic activity, stating that financing conditions remain restrictive. The central bank reduced its forecast for Eurozone GDP growth for the next three years: for 2024—to 0.8% (from the previous estimate of 0.9%), for 2025—to 1.3% (from 1.4%), and for 2026—to 1.5% (from 1.6%). On the other hand, the central bank revised its inflation forecasts upward. Inflation is expected to rise again in the second half of this year, partly because previous sharp declines in energy prices will fall outside the annual figures. Regarding core inflation, forecasts for 2024 and 2025 were revised upward as services inflation was higher than expected.
This is a hawkish signal reinforced by ECB President Christine Lagarde's rhetoric at the concluding press conference. Lagarde said that inflation in the services sector "requires attention and monitoring," that inflation indicators will rise in the fourth quarter, and that regarding the October meeting, "the ECB has no commitments."
Traders interpreted the rhetoric of the head of the ECB in favor of the single currency. Let me remind you that the main "flaw" in the August inflation report in the Eurozone was the services sector. Lagarde mentioned this circumstance for a good reason. Inflation in the services sector increased by 4.2% in August, exceeding the July result (when a growth of 4.0% was recorded).
Thus, the ECB made an expected decision but once again called into question further steps to ease monetary policy—at least in the context of the October meeting. Such ambiguous outcomes of the September meeting allowed EUR/USD buyers to organize a minor correction: the pair bounced off the base of the 1.10 figure and rose to the target of 1.1060.
Another fundamental factor contributed to the pair's growth. At the start of the US trading session, an important inflation indicator—the Producer Price Index—was published. The overall PPI decreased to 1.7% annually in August, against a forecasted decline of 1.8%. The indicator has been decreasing for the second consecutive month. The core index increased slightly but slower than most experts expected (2.4% instead of 2.5%).
The resulting fundamental background has put (at least) the downward trend of EUR / USD on hold. The prospects of a decline into the area of the 0.9000 level have come into serious question. Now, market participants will await the Federal Reserve's verdict, which will be announced on September 18.
From a technical standpoint, the pair on the daily time frame is between the middle and lower lines of the Bollinger Bands indicator, above the Kumo cloud, below the Kijun-sen line, and on the Tenkan-sen line. It is advisable to consider buying only when the pair overcomes the resistance level of 1.1080—that is when it moves above the middle line of the Bollinger Bands and above all the lines of the Ichimoku indicator, which will form a bullish Parade of Lines signal. The target for the upward movement is 1.1180, which is the upper line of the Bollinger Bands indicator on the daily chart. However, since buyers have not yet confirmed the "seriousness of their intentions" (that is, they have not yet overcome the target of 1.1080), it is advisable to maintain a wait-and-see position on the pair.
