The euro fell, reaching a nine-day low following the European Central Bank’s (ECB) decision to cut interest rates by 25 basis points. This step adjusted the deposit interest rate to 3.0%.
The ECB also signaled the possibility of further rate cuts in the future, in line with expectations for a gradual approach to achieving the medium-term inflation target of 2%. The central bank’s statement indicated a slower economic recovery than previously expected, while maintaining that monetary policy will remain restrictive.
Nevertheless, the ECB emphasized its commitment to a data-dependent approach from meeting to meeting, without committing to a specific interest rate path in advance. After the announcement, the euro fell to $1.0470, compared to $1.0488 before the rate cut.
The limited depreciation of the euro can be attributed to market expectations that could have prompted a larger interest rate cut of 50 basis points.
At the same time, the attractiveness of the US dollar has been strengthened by its safe haven status and higher return prospects. Chris Turner, global head of markets at ING, noted in a report that the bank continues to favor the U.S. dollar because of these characteristics.
The dollar has maintained its strength throughout December, with US trading partners, including the Eurozone, poised to cut rates quickly. According to ING, the DXY, which fell slightly by 0.1% to 106.581, has the potential to rise to 107 if the ECB hints at further rate cuts.
In a separate forecast, BNP Paribas (OTC:) Markets 360 predicted a continued decline in the euro against the dollar, anticipating parity in 2025.
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