07:10 AM EDT, 09/12/2024 (MT Newswires) -- The euro (EUR) has fallen back against the US dollar (USD) ahead of Thursday's European Central Bank policy meeting bringing the pair closer to the 1.1000 level, said MUFG.

It has been mainly driven by the stronger US dollar leg rather than a weaker euro, wrote the bank in a note to clients. In contrast, the euro has strengthened modestly against sterling (GBP) resulting in EUR/GBP rising up towards 0.8450.

Sterling has weakened against the euro since the release Wednesday of the monthly gross domestic product report from the United Kingdom revealing that growth flat-lined for the second consecutive month in August, stated MUFG. After surprisingly strong growth in the H1 of this year, the UK economy is losing upward momentum in the H2 of this year.

The data broadly fits with the Bank of England's view that GDP growth would slow to 0.4% in Q3 after expanding by 0.6% in Q2 although risks are now more tilted to the downside.

The bank doesn't expect the BoE to cut rates again until the November Monetary Policy Committee meeting, but there is an increasing likelihood that the BoE could deliver back-to-back cuts in November and December that could trigger some reversal of sterling strength if the BoE shifts to a faster pace of cuts later this year.

MUFG expects the ECB to cut its policy rate again on Thursday by 25bps for the second time in the current easing cycle. The policy adjustment is fully priced in ahead of Thursday's policy meeting so the market reaction on Thursday will be mainly driven by updated policy guidance.

The bank predicts that the ECB will stick to its current plans for cautious easing. While President Christine Lagarde is unlikely to rule out another cut as soon as next month, MUFG believes it remains more likely that the ECB will wait until the December policy meeting to lower rates for a third time.

A stronger signal for an October cut would be needed to trigger a bigger euro sell-off, according to MUFG.