The euro is showing limited movement ahead of the ECB rate decision later today. EUR/USD is trading at 1.0879 in the European session, up 0.10% on the day.

ECB likely to cut, but then what?

Barring a huge surprise, the European Central Bank will cut its deposit rate later today. The ECB has maintained the deposit rate at 4.0% for five straight months as policy makers have been content to maintain a “higher for longer” stance after a steep rate-tightening cycle.

Are conditions ripe for a rate cut? ECB officials think so as they can point to an inflation rate which has fallen from double-digits to below 3%. The ECB is confident that inflation will not rebound after a rate cut. However, that doesn’t mean that the titanic battle against inflation is over. Far from it – the 2% inflation target has proven elusive and perhaps more worrying, eurozone inflation accelerated in May. The headline figure rose from 2.4% to 2.6% while the core rate climbed from 2.7% to 2.9%.
The ECB couldn‘t have been pleased with these inflation numbers but remains confident that inflation will continue to move lower. The eurozone economy has been sluggish and a rate cut should provide a boost to the economy and provide relief for consumers who are groaning under the weight of high interest rates.

The ECB has been careful not to commit to additional rate cuts and there’s a strong possibility that the central bank will wait until late in the year to see the effects of the rate cut before lowering rates for a second time. ECB policy makers will also be keeping an eye on the Federal Reserve, which won’t be cutting before September at the earliest. The Fed usually takes the lead on rate policy and the ECB will be hesitant to cut twice ahead of the Fed, as this could weaken the euro and send inflation higher.

The US releases nonfarm payrolls on Friday and the report is expected to show that the US labor market is slowly cooling off. In April, nonfarm payrolls fell to 175,000 down sharply from 330,000 in March and its lowest level in six months. Little change is expected in the May report, with a market estimate of 185,000.
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EUR/USD Technical

• EUR/USD tested resistance at 1.0895 earlier. Above, there is resistance at 1.0943
• 1.0842 and 1.0794 are the next support levels

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