Before Thursday's ECB meeting, it is worth taking a brief review of market expectations and EUR/USD. In recent days, interest rate expectations for the Fed and the ECB have partly been revised significantly: By year-end, the market expects the Fed to cut less than 50 basis points in total, while it is much more cautious with regard to the ECB, where it still sees significant cuts at the short end in particular, Commerzbank’s FX analyst Antje Praefcke notes.

USD could struggle to remain below the 1.09

“If ECB President Christine Lagarde expresses concerns about the economic risks in the euro area on Thursday and the data then confirm these concerns, the market could become even more certain about future interest rate cuts and put the euro under pressure. However, our economists think that the market is generally too pessimistic about the development of key rates in the euro area. They expect significantly fewer cuts.”

With regard to our forecast for the Fed funds rate, the market appears to be overly optimistic, as it is pricing in fewer cuts than our forecast. A correction of expectations in the direction of our experts' forecast would suggest losses in the USD. The market would have to correct its expectations for the ECB and Fed and EUR/USD would rise in the foreseeable future.”

“All in all, this means to me that the USD could struggle to remain below the 1.09 mark in EUR/USD on its own, but the ECB and Lagarde could potentially pave the way for this on Thursday on the euro side if the market were to step up its interest rate cut expectations for the ECB again.”