The market is always right. If it seems wrong, refer to the first point. After the ECB meeting, the dovish rhetoric of Governing Council officials proved that selling EUR/USD was the right decision. A few hours ago, such sales might have seemed surprising, as Christine Lagarde said nothing new at the press conference. Most importantly, she did not hint at a deposit rate cut in September, only noting that the meeting would be lively.
According to the head of the Bank of France, Francois Villeroy de Galhau, markets are likely right in expecting two more acts of monetary expansion in 2024. The official did not make a specific forecast, as the outcome will depend on the data. Traders estimate a 20 basis point cut in the deposit rate at the beginning of autumn, which implies an 80% probability of an additional 25 basis point cut. The futures market is still leaning towards two acts of monetary policy easing by the year's end.
The head of the Bank of Lithuania, Gediminas Simkus, also agreed with market indications. The disinflation trend is clear, and if there are no surprises or unforeseen events, the Governing Council will discuss lowering borrowing costs at the upcoming meetings.
Danske Bank forecasts that by the end of 2025, the ECB will cut the deposit rate by 100 basis points to 2.75%. This forecast is based on the consensus estimate of experts in an ECB survey that inflation will reach the 2% target next year and slow to 1.9% in 2026.
Forecasts for European Inflation
Where will the federal funds rate be by then? This is a very difficult question. If Joe Biden, who does not interfere with the Fed's activities or make statements about the US dollar's exchange rate, were president, the central bank would likely seriously ease monetary policy. This would lead to EUR/USD rising towards 1.2.
However, COVID-19 has added to the current president's challenges, and his competitor's chances of victory are steadily increasing. Donald Trump is an unpredictable person. His policy is pro-inflationary. New tariffs will lead to supply chain problems, fiscal stimulus will boost consumer activity, and immigration restrictions will contribute to wage growth.
As a result, the Fed may pause easing monetary policy. The US dollar will rise, which will surely not please the future head of the White House. It would not be surprising if he began pressuring the central bank and utilizing currency interventions.
Technically, on the daily chart, EUR/USD is forming a bar with a long lower shadow. This will indicate the weakness of the bears and provide a basis for buying on a breakout above the high near 1.0905. Otherwise, it is advisable to stick to the previously stated strategy of forming long positions on a rebound from supports at 1.0865 and 1.0840.
