The euro experienced a decline, reaching a nine-day low, following the European Central Bank’s (ECB) decision to reduce interest rates by 25 basis points. This move adjusted the deposit rate to 3.0%.
The ECB also signaled the possibility of further rate cuts in the future, aligning with expectations for a gradual approach to achieving the 2% medium-term inflation target. The central bank’s statement indicated a slower economic recovery than previously anticipated, while maintaining that monetary policy will continue to be restrictive.
Despite this, the ECB emphasized its commitment to a data-dependent and meeting-by-meeting approach, refraining from pre-committing to a specific rate path. Following the announcement, the euro fell to $1.0470, down from $1.0488 prior to the rate cut.
The limited fall in the euro’s value can be attributed to market anticipations that had accounted for a potential larger rate cut of 50 basis points.
Simultaneously, the U.S. dollar’s appeal has been reinforced by its safe-haven status and higher yield prospects. Chris Turner, the global head of markets at ING, noted in a report that the bank continues to favor the U.S. dollar due to these attributes.
The dollar has sustained its strength throughout December, with trading partners of the U.S., including the Eurozone, poised to reduce interest rates rapidly. According to ING, the DXY dollar index, which had a slight decline of 0.1% to 106.581, has the potential to climb towards 107 if the ECB hints at additional interest-rate cuts.
In a separate forecast, BNP Paribas (OTC:BNPQY) Markets 360 projected a continued decline for the euro against the dollar, anticipating parity in 2025.
