Rate Cut Speculation vs. Yield Surge: EUR/USD in Turmoil

EU R/USD is under pressure, trading below 1.0500, as the US Dollar strengthens alongside rising US Treasury yields. This movement follows the US House of Representatives’ approval of a $4.5 trillion tax cut plan on Tuesday.

Market focus now shifts to key economic data releases: the preliminary German Harmonized Index of Consumer Prices (HICP) for February and the US Personal Consumption Expenditures (PCE) inflation data for January, both scheduled for Friday.

The US Dollar Index (DXY) has rebounded sharply, recovering to near 106.50 after initially dipping to an 11-week low of 106.10. This Dollar strength is driving the EUR/USD decline.

Conversely, the Euro is gaining against other currencies as attention turns to the upcoming European Central Bank (ECB) policy meeting. The ECB is widely expected to cut its Deposit Facility rate by 25 basis points to 2.5%. Investors are particularly interested in the ECB’s forward guidance on future rate adjustments, as policymakers have consistently signaled their intent to lower rates if inflation sustainably returns to the 2% target.

Recent data, including the lower-than-expected Eurozone Q4 Negotiated Wage Rate (4.12% vs. 5.43% in Q3), has fueled expectations of a dovish ECB stance. However, ECB board member Isabel Schnabel has cautioned against overly dovish interpretations, arguing that the Eurozone’s economic weakness is primarily due to “structural factors” rather than high borrowing costs. She suggested that the current 2.75% rate may no longer be restrictive.

Looking ahead, Friday’s German HICP data will be a crucial indicator for Eurozone inflation trends.