ECB Officials Send a "Steady Signal"
The euro rose during Tuesday's trading but then fell back. The reason is that several high-ranking ECB officials spoke out, emphasizing there is no need for further easing at present. Latvia's central bank governor Kazaks stated bluntly: "Currently, the inflation rate is close to 2%, and there's no reason to cut rates immediately."
Executive Board member Schnabel emphasized that monetary policy should remain stable, be tolerant of slight deviations in inflation if necessary, and believes that tariff shocks are more inflationary than deflationary. Spain's central bank governor Escrivá also noted publicly that uncertainty still exists, and policy needs to remain flexible, but maintaining interest rates at the current level is more appropriate for now.
Overall, after a year of multiple rate cuts, the ECB is clearly taking a wait-and-see approach, avoiding excessive easing that could weaken policy space.
Euro Faces Resistance After Short-Term Surge
The foreign exchange market reacted directly. The euro briefly strengthened above 1.18 against the dollar but failed to maintain its gains. Traders believe that while the ECB's "cautious tone" provided some support for the euro, the lack of further easing expectations limited sustained buying.
Analysts point out that if the Eurozone's subsequent inflation data remains stable, the euro might oscillate within a range, with the strength of the dollar becoming a larger variable.
Federal Reserve Cuts Rates by 25 Basis Points as Expected
In contrast to the ECB's inaction, the Federal Reserve, in its latest decision, restarted rate cuts after nine months, reducing by 25 basis points and lowering the target rate range to 4.00%-4.25%.
However, the decision to cut rates was not unanimous. New Governor Milan cast a dissenting vote, advocating for a one-time cut of 50 basis points. This disagreement reflects differing understandings within the Fed of the current economic environment. Most officials favor gradual easing, while some believe the economic downturn risks warrant a quicker response.
Powell's Remarks "Throw Cold Water"
The market initially reacted positively to the rate cut decision but shifted to caution following remarks by Fed Chairman Powell. He emphasized that this rate cut was a risk management move, not the start of sustained easing. "There is no need to quickly adjust rates," Powell stated.
These comments directly led to the Nasdaq index dropping over 1% during the session, the dollar index dipping first before recovering, and a V-shaped reversal in U.S. Treasury yields. Investors worry that the Fed's moderate stance means continued high uncertainty about future policies.
The "Double Dilemma" of Employment and Inflation
Powell admitted at the press conference that the U.S. labor market is showing signs of cooling, with rising unemployment concerning some groups. Meanwhile, overall inflation remains high, creating a "dilemma" in policy making.
Typically, weakening employment means a need for rate cuts to stimulate the economy, but high inflation demands maintaining tight policy, forcing the Fed to be especially cautious about the extent and pace of rate cuts.
Outlook for the Euro and the Dollar
In summary, the ECB is signaling stability, emphasizing no rate cuts for now, while the Fed has cut rates but stresses it won't quickly enter an easing cycle. Amid these shifts, EUR/USD's movement is expected to remain volatile in the short term.
Market focus will next turn to Eurozone inflation data and the latest U.S. employment and consumption indicators. If the European economy continues to weaken, the euro's upward momentum will be limited; if the Fed signals stronger easing in future meetings, the dollar may come under pressure again.
