The euro (EUR) could hit new multi-month lows this week as the European Central Bank (ECB) prepares to announce its latest interest rate decision on Thursday.
Ahead of the highly anticipated ECB policy meeting, euro exchange rates are under pressure. EUR/USD is hovering just a cent above the two-year low it reached in late November, while EUR/GBP trades just shy of a 30-month low.
What is the ECB expected to do?
The ECB is widely expected to announce another 25-basis-point interest rate cut following its December meeting. However, as the cut is already priced in by EUR investors, the focus will shift to the bank’s forward guidance.
Expect the language used by the ECB to be closely scrutinised by investors as they seek more insight into how aggressively the bank may ease its monetary policy in the coming months.
How will the ECB’s interest rate decision impact the euro?
The tone of the ECB’s guidance will likely dictate the next move for EUR exchange rates.
If the ECB signals that it will seek to pause its current easing cycle following this week’s rate cut, we could see an appreciation of the euro.
However, most analysts predict the bank will hint at further rate cuts in the coming months – an outcome which could see EUR exchange rates test new lows on Thursday.
There is also the outside chance that the ECB could surprise with a more aggressive 50bps rate cut this month, which could trigger an even more dramatic selloff of the euro.
Broader market moves
Beyond the ECB meeting, the publication of the latest US consumer price index could also weigh on the euro. If US inflation accelerates, the US dollar (USD) may strengthen, placing further pressure on the EUR/USD exchange rate.
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