News Analysis: Fed rate cut prospects, economic outlook weigh down euro

The exchange rate retreated to a three-week low of 1.1065 on Friday, after witnessing a four-day falling streak the previous week, according to data from the European Central Bank (ECB).

The Friday’s retreat came ahead of a much anticipated speech by Fed Chairman Jerome Powell in the central bank’s annual symposium, while the market awaited hints on the future monetary policy of the largest economy in the world.

However, the Fed Chairman Jerome Powell did not give a clear signal about further interest rate cuts. He pledged to “act as appropriate to sustain the expansion,” a phrase that he has used for several times in recent months.

Analysts have noted that the speech had limited impact on the market as it contained no big surprises.

The euro-to-dollar exchange rate fell to a historical low of 1.1037 at the start of the month, after the Federal Reserve’s cautious move of a 25-basis point rate cut at the end of July pushed up the dollar.

According to the minutes of the Fed’s July meeting that was released on Wednesday, Fed officials were divided over whether to cut interest rates.

STIMULUS PACKAGE EXPECTED

Within the euro zone, incoming economic data over the past months have mostly been on the soft side, and the ECB has opened doors for monetary easing after its policy meeting in July.

Germany’s central bank Bundesbank is not expecting the country’s economy to pick up during summer, according to its latest monthly report published Monday.

The export momentum of Germany’s mechanical engineering sector, a pillar sector of the EU powerhouse, has slowed considerably, with machine deliveries in the first six months up only by a nominal 0.9 percent from the same period last year.

Some ECB policymakers have expressed worries over the spillover of the weakness in the manufacturing to the services and construction sectors, which are currently showing resilience, the bank revealed in its policy meeting minutes.

Italy, another EU country facing slow-growing economy, has been thrown into a new period of political instability on Tuesday after the nearly 15-month-old government of Prime Minister Giuseppe Conte crumbled. It’s a latest episode of uncertainties in EU in addition to a possible no-deal Brexit.

Euro area annual inflation was 1.0 percent in July 2019, down from 1.3 percent of the previous month and missing the bloc’s 2-percent target.

Although the ECB refrained from interest rate cuts in its July meeting, the market generally believed it is poised for a stimulus package in its next meeting in September.

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