**Title: EUR/USD Falls Below 1.0850 Amid Dollar Strength and ECB Dovish Signals**
*Adapted and expanded from the original article by Kenny Fisher on Mitrade.com*
The euro has come under renewed pressure against the US dollar, with the EUR/USD pair slipping below the significant 1.0850 level. The movement in the forex markets reflects wider concerns about the divergent monetary policy outlooks between the European Central Bank (ECB) and the U.S. Federal Reserve (Fed). While U.S. inflation remains a sticky issue potentially delaying interest rate cuts, the ECB appears increasingly dovish, providing clear signals of its readiness to ease policy further.
This article will explore the factors behind the euro’s recent slide, the broader macroeconomic backdrop shaping central bank moves, and what traders might expect from EUR/USD in the near term.
## Key Developments Influencing EUR/USD
### 1. ECB President Christine Lagarde Sends Dovish Signals
On Monday, ECB President Christine Lagarde commented that inflationary pressures within the eurozone were easing and that the ECB was getting closer to bringing inflation back to its 2 percent target. This reinforced investor expectations that the ECB could proceed with further rate cuts after initiating its first interest rate reduction in June 2024.
– Lagarde emphasized that “inflation expectations remain well-anchored” and the ECB is “making progress towards the target.”
– While she did not clearly commit to the timing or magnitude of future cuts, her overall tone was more accommodating compared to previous addresses.
Her statement marks a continuation of the ECB’s dovish tilt. Following the ECB’s June rate cut—the first reduction since 2016—market participants have priced in additional easing measures later in 2024 or early 2025. Some analysts expect another cut as soon as September, depending on incoming inflation data.
### 2. Eurozone Core Inflation Trends Lower
The most recent economic data supports Lagarde’s cautious optimism. Preliminary inflation figures from the European Union revealed:
– Headline inflation at 2.5 percent year-over-year in June 2024
– Core inflation dropped to 2.8 percent, down from 2.9 percent in May
While inflation remains above the ECB’s 2 percent target, it has dropped significantly from 2023 levels, when it exceeded 5 percent. The slowing pace of core inflation, which excludes volatile components such as energy and food, aligns with the ECB’s rationale for loosening policy.
Additionally, forward-looking indicators, including purchasing managers’ indices and consumer sentiment, point to subdued economic momentum in the Eurozone. These weak growth prospects could push the ECB to act further to support demand.
### 3. The Fed’s Hawkish Tone Strengthens the USD
On the other side of the Atlantic, the U.S. Federal Reserve remains firmly focused on fighting inflation. While June’s CPI report showed a larger-than-expected cooling in both headline and core inflation, Fed officials have cautioned against premature celebrations or hasty rate cuts.
– The U.S. economy grew at an annual rate of 2.0 percent in Q1 2024
– Unemployment remains below 4.0 percent
– Consumer spending and wage growth remain relatively robust
This strong data allows the Fed to adopt a cautious stance. Market participants initially hoped for a rate cut as early as July; however, recent commentary from Fed Chair Jerome Powell and other officials indicates that they “need greater confidence” that inflation is moving sustainably toward the 2 percent target.
As a result:
– The probability of a Fed rate cut in July has diminished significantly
– Futures markets now price in a 60 percent chance of a September cut, down from 80 percent earlier in July
The absence of immediate Fed easing supports the dollar via higher relative yields on U.S. assets, making them more attractive to investors.
### 4. Technical Breakdown of EUR/USD
EUR/USD broke below the psychologically important
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