- The European Central Bank is set to cut interest rates by 25 bps on Thursday.
- ECB President Christine Lagarde may stick to a data-dependent stance on the future rate outlook.
- The fate of the euro depends on updated ECB forecasts and Lagarde’s speech.
The European Central Bank (ECB) is set to announce its first interest rate cut since 2019 on Thursday at 12:15 GMT.
Updated staff economic forecasts will be released alongside the interest rate announcement. ECB President Christine Lagarde’s press conference will follow at 12:45 GMT.
What should be expected from the European Central Bank’s decision on interest rates?
A 25 basis point (bps) cut in the Deposit Facility base rate has been fully achieved, following the conclusion of the Governing Council’s monetary policy meeting in June, which will reduce the cost of borrowing from an all-time high of 4, 0% to 3.75%.
Some ECB policymakers have long promised a rate cut in June. Therefore, the main focus will be on the communication of the central bank about the progress of interest rates. Market participants will be closely scrutinizing the language in the policy statement as well as ECB President Christine Lagarde’s words during the press conference to gauge the scope and timing of the next rate cut this year.
Although Eurozone inflation has moved closer to the central bank’s 2.0% target, steady services inflation (above 4.0% annually in May) raised expectations that the ECB will not embark on an aggressive easing cycle. Meanwhile, annual Eurozone inflation rose from 2.4% in April to 2.6% in May, beating forecasts for a 2.5% increase.
Further, a strong economic recovery and a tight labor market on the old continent are likely to force the ECB to refrain from committing to additional rate cuts at meetings after June.
Lagarde may therefore stick to the Bank’s data-driven stance and avoid giving any guidance on the policy outlook.
“I think they will be much less decisive about what comes next than they were around the June meeting,” BNP Paribas chief economist for Europe Paul Hollingsworth said in a research note.
Markets expect less than 60 bps of cuts this year, implying two moves and less than a 50% chance of a third. That’s down from three rate cuts forecast when the ECB last met in April and at least five rate cuts forecast by 2024 in January, according to Reuters.
How can the ECB meeting affect EUR/USD?
Heading into the ECB standoff, the euro is consolidating below a three-month high of 1.0916. The US dollar (USD) struggles to maintain bullish momentum amid reviving bets on a Federal Reserve (Fed) interest rate cut in September following weak US ISM Manufacturing PMI data for May.
ECB President Christine Lagarde’s non-committal stance on the timing of the next rate cut could add extra legs to the EUR/USD recovery, as it would mean the Bank could keep rates higher for longer in the middle of continuous inflation.
On the other hand, if Lagarde dismisses concerns about rising inflation, it could be read as a bit odd by market participants, ultimately turning negative for the EUR/USD pair.
FXStreet Senior Analyst Dhwani Mehta offers a brief technical outlook for euro trading on ECB policy announcements: “EUR/USD extends its battle around strong resistance near 1.0890, suggesting buyers are gather strength. The 14-day Relative Strength Index (RSI) stands firmly above the midline near 60, adding credence to the pair’s upside potential.”
“A hold above the 1.0950 level is critical for further upside towards the psychological level of 1.1000. Euro buyers will then target static resistance at 1.1050. Conversely, the area of initial demand is seen around the 21-day simple moving average (SMA) at 1.0833, below which the 1.0800 support could be tested. The 100-day SMA approximates that level. Further south, the area of confluence of 50-day SMA and 200-day SMA near 1.0775 could act as a tough nut to crack for Euro sellers,” adds Dhwani.
