Forex Analysis & Reviews: 02.05.2025 - The ECB Has No Other Choice

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02.05.2025 10:03 AM

The ECB Has No Other Choice

The European currency continues to lose ground against the U.S. dollar as traders increasingly place bets on the European Central Bank's upcoming monetary policy decisions.

According to data, the chances of an interest rate cut by the European Central Bank in September have risen significantly. This has been driven by several factors, including a slowdown in eurozone inflation and signs of weakening economic growth.

Recent statistical data indicates that inflation is gradually approaching the ECB's 2% target, which allows the regulator to consider easing monetary policy. At the same time, economic indicators such as the PMI business activity index and retail sales signal a decline in growth rates, which could negatively impact employment and investment.

Today, new eurozone inflation data will be released, which could further increase the likelihood of another rate cut, as overall inflation is expected to fall to 2.1% in April from 2.2% in March. For reference, inflation stood at 2.5% back in January. Additionally, weak reports on manufacturing PMIs across the eurozone will be published today, reinforcing confidence in the ECB's course of action.

Given these circumstances, many traders believe that the ECB may decide to lower its key interest rate at the next meeting. Such a move could stimulate economic activity by reducing borrowing costs for businesses and consumers. However, one must also consider the risks of a potential rebound in inflation due to recently introduced U.S. tariffs, which could require the ECB to take a more cautious approach to monetary policy.

Overall, the situation remains dynamic and requires close monitoring by both the regulator and market participants. The ECB's decision will carry significant implications for the eurozone economy.

Clearly, expectations of lower borrowing costs from the ECB have grown over the past month, as U.S. tariffs have eased concerns about the early stages of the region's economic recovery. Eurozone business activity surveys point to weaker performance, and the unexpectedly strong euro reinforces the view that inflation will continue to decline. Some traders are betting that policymakers will cut rates by as much as 75 basis points to 1.5% over the next four months.

Money markets are currently pricing in 67 basis points of additional ECB rate cuts this year, implying that two quarter-point cuts are fully priced in, with a 68% chance of a third. This would bring the key rate down to 1.5%, compared to expectations just a month ago that it would only fall to 2%.

EUR/USD Technical Outlook

At the moment, buyers need to focus on breaking through the 1.1337 level. Only this would open the path toward testing 1.1386. From there, the pair could target 1.1437, though reaching that level without strong support from major market players will be difficult. The furthest target remains the 1.1487 high. If the instrument declines, I expect meaningful buying activity only near the 1.1265 level. If no buyers appear there, it would be wise to wait for a new low around 1.1215 or consider entering long positions from the 1.1185 level.

GBP/USD Technical Outlook

Pound buyers need to reclaim the nearest resistance at 1.3315. Only this will allow them to target 1.3354, above which it will be quite difficult to break through. The final target would be the 1.3394 level. In case of a decline, bears will attempt to take control of the 1.3280 level. If they succeed, a breakout of this range would deal a serious blow to the bulls and push GBP/USD down to the 1.3250 low, with potential continuation toward 1.3205.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.