The EUR/USD pair returned to the lower 1.0800s in anticipation of Wednesday’s Fed meeting. Speculation is rising that the Fed might adjust its expected number of interest rate cuts for 2024. The ECB President, Lagarde, mentioned falling wage inflation, a significant metric for the ECB, contributing to the euro’s decline.

Lagarde highlighted a decrease in average wage growth for existing wage contracts in 2024, from 4.4% in January to 4.2% in March. Lower inflation raises the likelihood of ECB interest rate cuts, which could negatively impact the euro and the EUR/USD pair.

The Fed’s meeting could also influence EUR/USD, with expectations for possible revisions in economic forecasts and the “dot plot,” reflecting the Fed’s consensus on future rate paths. Analysts suggest the Fed might project fewer rate cuts in 2024 due to elevated inflation pressures.

In Europe, ECB speakers discussed the timing of potential interest rate cuts, with divided opinions emerging. ECB Vice-President de Guindos emphasized the need to wait due to high service inflation. Further speeches from ECB officials could affect EUR/USD volatility.

Technical analysis indicates EUR/USD’s short-term uptrend reversal, with a potential move towards key support levels around 1.0800. Despite a bullish reversal pattern forming on Tuesday’s chart, the MACD indicator suggests a bearish trend change. Wednesday’s candlestick formation will confirm the bullish reversal potential.


What is the ECB, and how does it affect the euro?

The European Central Bank (ECB), headquartered in Frankfurt, Germany, serves as the Eurozone’s reserve bank. The ECB sets interest rates and oversees monetary policy in the area. The ECB’s principal goal is to preserve price stability, which implies controlling inflation at around 2%. The critical method for doing this is to raise or reduce interest rates. Relatively high-interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at eight sessions each year. The presidents of the Eurozone’s national banks and six permanent members, including ECB President Christine Lagarde, take decisions.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is quantitative tightening (QT) and how does it impact the euro?

Quantitative tightening (QT) is the inverse of QE. It is conducted after QE when an economic recovery is underway and inflation begins increasing. During QE, the European Central Bank (ECB) acquires government and corporate bonds from financial institutions to create liquidity; during QT, the ECB ceases purchasing new bonds and stops reinvesting the principal maturing on its existing bonds. It is often favorable (or bullish) for the euro.

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