The European Central Bank is heading to cut interest rates at its meeting next Thursday, opening the door to a decline in the euro as monetary policy diverges between Frankfurt (headquarters of the European Central Bank) and Washington (headquarters of the US Central Bank).
With an expected cut of a quarter of a percentage point, European monetary policy officials will finally accept a widening of the spread between borrowing costs on both sides of the Atlantic, the effects of which they have discussed for several months, according to Bloomberg Agency in a report.
Separate road
Policymakers at the European Central Bank, led by Christine Lagarde, insist that they are comfortable taking a separate path from the Federal Reserve, even if that threatens to weaken the currency (the euro), which in turn could raise the inflation rate.
The ECB can already see how divergent political expectations are starting to impact global markets, with the euro falling to its lowest level against the pound in almost two years amid expectations that the Bank of England will lag behind the European Central Bank in cutting interest rates.
Bank of Italy Governor Fabio Panetta admitted on Friday that lowering borrowing costs poses a risk to the currency and prices, but added that the tough US policy could also harm global demand and thus curb inflation in the euro zone.
Recently, the Governor of the Bank of Austria, Robert Holzmann, was more pessimistic, as he admitted that the US Federal Reserve and the dollar pose a clear danger in the eyes of officials.
Thursday’s decision will include quarterly forecasts that the market will examine for hints about future policy intentions, as well as a press conference that Lagarde will hold.
Financial markets are currently betting on two cuts in total this year, with a small possibility of a third cut.
Similar moves
The Danish Central Bank is likely to follow the European Central Bank’s move by cutting a quarter of a percentage point just hours after the euro zone results.
Elsewhere, US payrolls and Canada’s highly anticipated decision on a possible rate cut will be among the week’s highlights.
United States and Canada
In the wake of new US inflation and spending data, next Friday’s government jobs report is expected to show flat employment growth again in May.
A Bloomberg survey indicated an increase of 190,000 jobs, which is less than in April.
This would lead to a slowdown in average job growth over the last three months, adding to the evidence of declining labor demand.
The unemployment rate is expected to remain at 3.9%.
The US Department of Labor is scheduled to release job openings data for March next Tuesday, and economists expect approximately 8.4 million job vacancies, slightly less than in February.
