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The European Central Bank (ECB) is widely anticipated to cut interest rates by 25 basis points (bps) in the upcoming monetary policy meeting. If confirmed, this move will lower the Main Refinancing Rate to 4.25%, marking a significant step in the ECB’s monetary policy.

In this video we explore the key talking points and levels for EURUSD.

Market Sentiment and Expectations

Market participants are overwhelmingly expecting this rate cut, with an 88% probability factored into current pricing. Typically, in this market scenario we would see the EURO weaken before an event but that hasn’t been the case from EURUSD.

Inflation Concerns

One of the primary drivers behind this anticipated rate cut is the recent decline in inflation. However in May, inflation in the Eurozone ticked up to 2.6%, remaining above the ECB’s target of 2% and raising concerns about the cost of living and economic stability. By reducing interest rates, the ECB will lower borrowing costs, encourage spending, and stimulate economic growth, which could be counterintuitive for bringing inflation lower.

Does this mean that the ECB is normalizing inflation rates between 2-3% instead?

Labor Market Weakness

In the US the latest data from the ADP Non-Farm Employment Change, showed a decline to 152,000. This decline signals signs of weakness in the labor market, suggesting that businesses may be scaling back hiring in response to economic uncertainties. A weaker labor market can dampen consumer confidence and spending, fueling speculation that the Federal Reserve could begin cutting rates in September. The CME Fed watchtool is now pricing in a 55.3% chance of a cut in September and this could grow if Non-Farm Payrolls on Friday show further weakness in the US labor market. 


What This Means for the Eurozone

A rate cut by the ECB is expected to have several immediate and long-term impacts:

  1. Lower Borrowing Costs: Reduced interest rates will make loans cheaper for both businesses and consumers, potentially boosting investments and spending.
  2. Currency Depreciation: Lower interest rates typically lead to a weaker euro, which could benefit Eurozone exporters by making their goods more competitive on the global market.
  3. Inflation Control or Lack Of: Inflation could be a huge risk to this cut, rising inflation rates could prompt further tightening from the ECB. 


10 year and eurusd

The price on the chart has traded through multiple technical levels and some observations included:

  • The price of EURUSD is ranging between 4hr highs and lows of 1.0900 and 1.0800.
  • The market levels to watch going into the event is support at 1.0800 and resistance of 1.1000.

Have you watched our latest video update? You can see it here. 

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