Euro gains as ECB’s Lagarde pushes back on October rate cut

 The euro rose against the dollar on Thursday (Sep 12) after European Central Bank President Christine Lagarde dampened expectations for an interest rate cut next month and said the bank will let economic data dictate the next policy move.

“We are going to decide meeting by meeting,” Lagarde said in a briefing after the ECB eased rates again on Thursday by 25 basis points (bps) amid slowing inflation and economic growth. “I’m not giving you any commitment of any kind as far as that particular date is concerned, and our path is not predetermined at all.”

The ECB lowered its deposit rate to 3.5 per cent, as widely expected. The refinancing rate, however, was cut by a much bigger 60 bps to 3.65 per cent in a long-flagged technical adjustment.

Rate futures have pared back bets of an October rate cut to just more than seven bps from 10 bps just before Lagarde spoke, according to LSEG calculations.

“Looking ahead, the path for interest rates remains uncertain,” said Yael Selfin, chief economist at KPMG in the UK. “While there is widespread consensus on the Governing Council that policy restrictiveness should be eased, divergent views remain around the pace of cuts.”

She expects further easing in December that would take the deposit rate down to 3.25 per cent. If the eurozone outlook weakens further, Selfin sees ECB policymakers increasing the pace of cuts next year towards a terminal rate of around 2.25 per cent.

The euro was last up 0.3 per cent at US$1.1039, but down 0.5 per cent so far this week. The euro rose 0.4 per cent to 157.38 yen.

In the United States, the dollar index fell 0.2 to 101.58, driven by gains in the euro, the largest component of the index.

Against the yen, the dollar was last flat on the day at 142.41, after gaining 0.2 per cent so far this week.

Mixed US economic data released on Thursday cemented expectations of a 25-bp cut next week by the Federal Reserve.

US initial jobless claims rose 2,000 to a seasonally adjusted 230,000 for the week ended Sept 7, data showed, in line with expectations. US producer prices increased slightly more than expected in August to 0.2 per cent as services costs rose, but the trend remained consistent with ebbing inflation.

Data for July was revised lower to show the producer price index unchanged instead of edging up 0.1 per cent as previously reported.

Economists polled by Reuters had forecast the PPI gaining 0.1 per cent. “Stable producer prices should drive investment and that will drive the economy,” wrote Scott Helfstein, head of investment strategy at Global X in emailed comments. “It is time for the Fed to cut, but they may well take it slow and steady. That seems to be their operating model.”

The US rate futures market has priced just a 13 per cent chance of a 50-bp cut this month, down from as high as 50 per cent on Friday following a mixed US nonfarm payrolls report.

For 2024, rate futures expect 105 bps cuts, down from about 113 bps earlier this week.

Bank of Japan board member Naoki Tamura, known as a policy hawk, said on Thursday the BOJ must raise rates to at least 1 per cent as soon as the second half of the next fiscal year but added that it would likely raise rates slowly and in several stages.

On Wednesday, fellow BOJ board member Junko Nakagawa reinforced the central bank’s tightening bias by saying low real rates leave room for further rate hikes. Those comments have helped the yen, which has gained 2.6 per cent so far this year versus the dollar.

In other currencies, sterling rose 0.3 per cent versus the greenback to US$1.3083 after dipping to US$1.30025 in the previous session, its lowest since Aug 20. REUTERS