Lower inflation pressures Euro

EUR/USD declines back to the lower 1.0800s on Wednesday, after several European Central Bank (ECB) speakers, including the President of the ECB Christine Lagarde and the Bank of Ireland Governor and ECB governing council member Gabriel Markhlouf cite lower inflation.

ECB's Lagarde highlighted lower wage inflation, something which at previous meetings she said the ECB would be watching closely before deciding future ECB policy moves.

"Average wage growth in 2024 for all existing wage contracts fell from 4.4% at the time of our January Governing Council meeting to 4.2% at the time of our meeting in March," said Lagarde at the ECB and its Watchers" conference on Wednesday.

Lower inflation increase the probability that the ECB will opt to cut interest rates which would be a negative move for the Euro (EUR) and the EUR/USD pair.

Interest rates, set by central banks, are a key driver of foreign exchange markets. Lower interest rates tend to depreciate a currency by attracting less foreign capital inflows and vice versa for higher interest rates.

EUR/USD could see volatility as the Federal Reserve (Fed) is scheduled to complete its March policy meeting at 18:00 GMT on Wednesday and while it is not expected to alter interest rates there is a chance it could revise its quarterly forecasts and accompanying statement. This could change the outlook for interest rates and therefore the US Dollar (USD) valuation.

Speculation is mounting that the Fed will revise its economic forecasts in the Summary of Economic Projections (SEP), and the “dot plot”, which reflects the Board of Governors of the Fed’s consensus of the future path of rates.

In the previous SEP, officials forecast three 25 basis points (0.25%) rate cuts in 2024 but some analysts now think there is a material risk that this could be revised down to two 25 bps cuts to reflect inflationary pressures remaining elevated.

“The summary of economic projections will be updated and contains hawkish risks in our assessment with the committee potentially projecting fewer cuts in 2024,” says David Doyle, head of economics at Macquarie, in a note about the Fed meeting.

In Europe, a similar debate is going on about when to begin cutting interest rates, with two camps emerging – those who favor waiting until the European Central Bank’s June meeting to decide (the official camp) and a smaller mutineering group who want to keep alive the possibility of an early spring rate cut.

On Tuesday, Vice-President of the European Central Bank (ECB), Luis de Guindos, maintained allegiance with the June camp after he said “we have to wait,” because “services inflation” remains too high.

The ECB President Christine Lagarde, ECB Chief Economist Philip Lane and ECB's Gabriel Markhlouf have all already spoken at the "ECB and its Watchers" conference. ECB Executive Board member Isabel Schnabel has also just made a speech in which she said the long-run level of interest rates in Europe may by rising.

Later, the President of the Bundesbank, Joachim Nagel, is scheduled to take the podium at a “Future of European Finance" conference at the ASKO Europa-Stiftung Foundation.