After holding stable above the 1.13 USD since Friday last week, the euro fell below the mark again on Thursday. Despite at least one expected rate hike by the Fed this year, initial uncertainties regarding the ECB's future monetary policy appear to be causing more concern to market participants.
Subdued economic expectations could force ECB to act
As far as the US dollar is concerned, market participants have already agreed that the Fed will cut key interest rates at least once this year, possibly two or three times. However, it is unlikely that the first rate cut will be decided at the Fed meeting next week. Although the US economic data are currently not fantastic, they are not terribly bad. Due to the overall global economic situation, however, it is very likely that the Fed will cut interest rates in July. Now that the US key interest rate has been raised to 2.5%, the Fed has at least some leeway for measures to strengthen the economy.
The ECB's ability to respond to a further slowdown in the economy, on the other hand, is more than limited. The Eurozone's key interest rate has been at 0% for some time now, and it is more than unlikely that it will fall into negative territory. As a result, the ECB would have to resort to other measures to support economic development in the euro zone. Most likely would be a renewed expansion of bond purchases to pump money into the economy. The willingness expressed by members of the Governing Council of the ECB to act if necessary in the event of a deterioration of the situation at least leads to slight uncertainty among financial market participants. This was reflected today in the moderate price losses.