A wide open ECB may be a EUR/USD buying opportunity
July 18 (Reuters) -EUR/USD traded lower Thursday after the ECB left rates unchanged as expected, but dips may be opportunities for bulls as expectations for Fed policy path may overwhelm euro area considerations.
ECB President Lagarde spoke of growth risks being tilted to the downside and that HICP should fall to target in the second half of 2025. She also said the rate path is not predetermined and that September is wide open.
Investors took that to mean September will meet market expectations for a rate cut with another to follow in December.
German yields DE2YT=RR fell while the dollar's yield advantage widened as German-U.S. spreads US2DE2=RR hit their widest since July 11.
Investors expecting a big EUR/USD fall may be disappointed however.
U.S. short-term rates markets price in a greater than 85% probability the Fed will cut rates by a total of 75bps in 2024, which is much higher than FOMC policymakers' own projections.
Should the Fed give clues at its July meeting that they may be less restrictive than they've previously stated, yield and the dollar could fall sharply and spreads would likely tighten.
As it stands now short-term rates markets expect the Fed to be more aggressive with their rate cut cycle than the ECB.
That scenario should keep risks tilted to the upside for EUR/USD.
For more click on FXBUZ
(Christopher Romano is a Reuters market analyst. The views expressed are his own)
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