Euro sharpens decline to five-week trough on the interest rate gap

Euro declined in European trade on Thursday against a basket of major rivals, sharpening losses for the third straight session against the dollar and plumbing a five-week trough, and moving away from the psychological level of $1.08 amid concerns about the Europe-US interest rate gap. 

Recent remarks by European Central Bank officials bolstered the case for an interest rate cut in June, while remarks by Fed official Christopher Waller hurt the odds of a US rate cut in June.

EUR/USD

EUR/USD fell 0.3% to 1.0893, the lowest since February 21, with a session-high at 1.0892, after losing 0.1% on Wednesday, the second loss in a row.  

Bearish Remarks 

Latvian Central Bank Governor Mārtiņš Kazāks said that inflation has fallen, with June now becoming a prime time to start cutting borrowing costs. 

Italian Central Bank Governor and ECB member Fabio Benita said that the ECB is heading for interest rate cuts as inflation quickly approaches the 2% target. 

ECB Chief Economist Philip Lane said the ECB is increasingly confident that European wage growth is slowing down to normal levels, opening the door for interest rate cuts. 

European Rates

Such remarks boosted the odds of a June interest rate cut by the ECB, with investors now expecting 90 basis points of total interest rate cuts by the ECB this year. 

Waller 

Federal Reserve member Christopher Waller said on Wednesday that there’s no rush to cut interest rates, and that he wants to see at least two months of low inflation data before cutting rates. 

He added that recent US data could delay the number of expected US interest rate cuts this year.

Following his remarks, the odds of a 0.25% US interest rate cut in June fell from 72% to 60%.  

Interest Rate Gap

The eurozone-US interest rate gap currently stands at 100 basis points in favor of the US, however it could increase to 125 basis points in June if the ECB went ahead with cutting rates and the Fed held its ground, which would put the euro in a weak position.