- EUR/USD trades close to a fresh YTD high of 1.1200 in European trading hours. The major currency pair edges lower as the Euro (EUR) underperforms its major peers amid growing speculation that the European Central Bank (ECB) will reduce interest rates again in the September meeting. The ECB is also expected to deliver one more interest rate cut in the last quarter of this year.
- Market expectations for ECB interest rate cuts in September have increased due to rising uncertainty over the Eurozone economic outlook and easing wage growth. Economic activity in the Eurozone surprisingly rose in August, as shown by the flash HCOB PMI report, but this rebound was largely driven by strong demand in France due to the Olympics in Paris. Economists considered it a one-time event and not a structural change.
- On the contrary, ECB Chief Economist Philip Lane said at the JH Symposium on Saturday that the monetary policy needs to be restrictive. Lane acknowledged that the ECB has made some progress in inflation but also said that the success over inflation is not assured, Reuters reported.
- For more cues on the interest rate guidance, investors will focus on the preliminary German and Eurozone Harmonized Index of Consumer Prices (HICP) data for August, which will be published on Thursday and Friday, respectively. Eurozone annual headline and core HICP, which excludes volatile items, are estimated to have decelerated to 2.3% and 2.8% respectively.
- Meanwhile, the IFO Institute reported on Monday that the German Business Climate, Current Assessment, and Expectations of August beat expectations but remained lower than July’s readings. The reading failed to provide any significant impetus to the EUR/USD pair.
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