06:39 AM EDT, 10/17/2024 (MT Newswires) -- The euro (EUR) has continued to weaken against the US dollar (USD) breaking back below support from the 200-day moving average at around 1.0870 ahead of Thursday's European Central Bank policy meeting, said MUFG.

The US dollar is continuing to rebound encouraged by the rising probability of Donald Trump winning the United States presidential election, wrote the bank in a note to clients. The recent move lower in EUR/USD is supported by yield differentials which have moved back in favor of a stronger US dollar.

While the US rate market has moved to scale back expectations for more aggressive Federal Reserve easing, the eurozone rate market has priced in a faster pace of ECB rate cuts. MUFG expects the ECB to step up the pace of easing on Thursday by delivering the first back-to-back 25bps rate cut after previously cutting rates in June and September.

The bigger-than-expected slowdown for inflation in the eurozone in September which fell back below the ECB's target to 1.8% has given the green light for the ECB to bring forward plans for another rate cut, stated the bank. At the same time, ECB policymakers have expressed more concern over the loss of growth momentum heading into year-end with Germany's economy still stagnating.

MUFG predicts the ECB to leave the door open to another rate cut at the final policy meeting of this year in December. An outcome that is already fully priced in the eurozone rate market with 25bps rate cuts now expected to be delivered at every upcoming policy meeting until April and the policy rate expected to fall back to or just below 2.00% next year.

It provides a high hurdle for a dovish policy surprise from the ECB on Thursday, added the bank. President Christine Lagarde would have to indicate that the ECB is considering larger 50bps cuts to trigger a bigger sell-off for the euro.

An outcome that MUFG still thinks is unlikely at the current juncture. Bank of France Governor Francois Villeroy de Galhau recently downplayed the likelihood of the ECB following the Fed by delivering larger 50bps cuts and prefers to stick to their "habit of acting gradually."