The euro rose against the dollar on Thursday after European Central Bank President Christine Lagarde lowered expectations for an interest rate cut next month and said the bank will let economic data dictate the next policy move.
“We will decide on a meeting-by-meeting basis,” Lagarde said at a news conference after the ECB cut rates again on Thursday by 25 basis points amid slowing inflation and economic growth. “I am not offering any kind of commitment as to that specific date and our path is not predetermined at all.”
The ECB cut its deposit rate to 3.5%, as widely expected. The refinancing rate, however, was cut by a much larger 60 basis points to 3.65% in a long-anticipated technical adjustment. Rate futures have reduced bets on an October rate cut to just over seven basis points from 10 basis points just before Lagarde’s speech, according to LSEG calculations. “Looking ahead, the path for interest rates remains uncertain,” said Yael Selfin, chief U.K. economist at KPMG.
“Although there is broad consensus in the Governing Council that monetary policy restrictions should be relaxed, there are still divergent opinions on the pace of the cuts.” She expects further easing in December, which would reduce the interest rate on deposits to 3.25 percent.
If the outlook for the euro zone weakens further, Selfin believes ECB policymakers will increase the pace of cuts next year to a terminal rate of around 2.25 percent. The euro rose 0.3 percent to $1.1039, but is down 0.5 percent so far this week. The euro was up 0.4 percent at 157.38 yen. In the United States, the dollar index fell 0.2 percent to 101.58, boosted by gains in the euro, the index’s largest component. Against the yen, the dollar closed flat on the day at 142.41, after gaining 0.2 percent so far this week.
U.S. economic data released on Thursday cemented expectations that the Federal Reserve will cut rates by 25 basis points next week. Initial claims for U.S. jobless benefits rose by 2,000 to a seasonally adjusted 230,000, in line with expectations, in the week ending Sept. 7, the data showed.
US producer prices rose slightly more than expected in August, up 0.2%, due to higher services costs, but the trend remained in line with declining inflation. July data was revised down to show the producer price index unchanged rather than rising slightly 0.1% as previously reported.
Economists polled by Reuters had forecast the PPI rising 0.1 percent. “Stable producer prices should boost investment and that will boost the economy,” Scott Helfstein, chief investment strategist at Global X, wrote in emailed comments.
“It’s time for the Fed to cut, but it might as well do it slowly and steadily. That seems to be its operating model.” The U.S. rate futures market has priced in just a 13 percent chance of a 50-basis-point cut this month, down from 50 percent on Friday following a mixed U.S. nonfarm payrolls report. For 2024, rate futures are looking for cuts of 105 basis points, down from 113 basis points earlier this week. Naoki Tamura, a board member of the Bank of Japan known as a policy hawk, said on Thursday the BOJ must raise rates to at least 1 percent as early as the second half of the next fiscal year, but added that it would likely raise rates slowly and in stages.
On Wednesday, BOJ board member Junko Nakagawa reinforced the central bank’s hawkish stance by saying low real rates leave room for further rate hikes. Those comments have helped the yen, which has gained 2.6 percent so far this year against the dollar. In other currencies, sterling rose 0.3 percent against the dollar to $1.3083 after falling to $1.30025 in the previous session, its lowest level since Aug. 20.
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