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Euro undermined by ECB disappointment

The euro has tested new multi-month lows over the past couple of weeks, in the wake of the European Central Bank’s (ECB) latest interest rate decision.

During this period, we’ve seen GBP/EUR climb from €1.16 to a five-month high €1.17, while EUR/GBP slipped from £0.86 to £0.85.

At the same time, GBP/USD has fluctuated between $1.26 and $1.27, while EUR/USD fell from $1.09, to $1.08.

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What’s been happening?

The euro remained on the defensive over the past couple of weeks. A key source of weakness was the disappointment that the ECB didn’t do more to dispel rate cut bets, following its first policy meeting of the year.

The US dollar was initially supported by some stronger-than-expected data and an easing of Federal Reserve rate cut speculation. Before these gains were trimmed by a positive shift in market sentiment toward the end of January.

Meanwhile, the pound has traded in a wide range in the second half of January, as uneven data and a fluctuating market mood infused volatility into the currency.

What do you need to look out for?

Looking ahead, the focus now turns to the Federal Reserve’s latest interest rate decision. USD investors will be paying close attention to the language used by Fed Chair Jerome Powell as they seek to gauge the odds of a March rate cut.

The Bank of England (BoE) is also set to conclude its first policy meeting of the year later this week. Will the bank push back on rate cut speculation and lift the pound?

In the meantime, the Eurozone’s latest GDP figures are expected to confirm the bloc slipped into a recession at the end of 2023, potentially applying even more pressure to the euro.

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