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ECB waits around while EUR climbs

Last week, traders supported the euro, driving its strong recovery. The reason is the reduced concern about further ECB actions, especially regarding a second rate cut in September.

While global markets anticipate an imminent rate cut in the United States, the situation in the eurozone is a bit different. The ECB has signaled increased concern about volatile inflation. This supported the euro's upward trend, experts say. Currently, the single currency is near a 4-month high, bouncing back after worries about the government in France.

Notably, the ECB kept the deposit rate unchanged at 3.75% following its meeting. ECB President Christine Lagarde emphasized that the agency was not committed to a specific course.

Meanwhile, Fed Chair Jerome Powell confirmed the regulator's confidence that inflation in the US had indeed decreased. This temporarily supported the euro, boosting it by more than 2% against the US dollar.

On Thursday, July 18, the euro traded near $1.0930, slightly down but still on track for its biggest monthly gain. This happened amid the weakening of the greenback against most currencies.

However, there is a fly in the ointment. Thus, in July, the euro slightly fell against the Swiss franc and the British pound. Some investors believe the euro should not be seen as a sure bet if Donald Trump wins the US presidential election. The eccentric billionaire previously suggested introducing import tariffs, which could hurt the eurozone economy but also spur inflation in the US and cause a rise in the US dollar.

"We expect the interest rate differential between the eurozone and the United States to narrow, which will lead to a depreciation of the US dollar. But the market believes that Trump's victory is a bullish event for the US dollar, so before the election, the depreciation of the US dollar will be limited," Amélie Derambure, a Senior Multi-Asset Portfolio Manager at Amundi, said. Traders expect more than two Fed rate cuts by the end of 2024, while the ECB is expected to cut rates less than twice.

The American currency maintained its advantage over most peer currencies for most of 2023, but its strength has waned. This month, the index measuring the dollar against major peers fell by 2%.

Meanwhile, the euro recovered, bouncing back after a June drop when it hit a two-month low against the US dollar. Now, the single currency awaits the ECB's rate decision. David Zahn, head of European Fixed Income and senior vice president within Franklin Templeton's Fixed Income Group, believes the ECB will cut rates in September and again in the fourth quarter of this year, "but they are in a slow rate cutting cycle," so patience is needed.

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