ECB Waiting Game on Rates Likely to Continue

The European Central Bank (ECB) is expected to stick to its wait-and-see stance at its upcoming meeting. Although inflation has continued to decline gradually, it remains above the bank's 2% target.

Will They Get the Timing Right?

ECB's Vice President Luis de Guindos spoke before last week's blackout period. He articulated the bank's shared view that while inflation has declined, further data is needed before cutting rates. Since the ECB signalled no further hikes last December, it has consistently pushed back against easing expectations and emphasised that curbing inflation will take time. Even doves have suggested that rate cuts are not immediately necessary.

As the wait continues, some analysts worry about the ECB's ability to time the rate cuts right. Acting prematurely could see inflation rebound, though this does not seem problematic given recent rhetoric from Governing Council members. On the other hand, cutting later could undermine the weak economic recovery. This has led to suggestions that the ECB may tweak its rhetoric this time to prepare markets for easing.​

It Comes Down to More Data

Almost two-thirds of economists in the latest Reuters poll indicate that the first interest rate cut will likely not occur until June. This gives the ECB at least one more policy meeting to maintain its current policy stance and outlook. As Christine Lagarde, President of the ECB, recently said, wage data for the first quarter will be particularly important. Since the data required to justify moving towards a more accommodative policy won't be available before May, the policy may remain unchanged.

 Markets have been slowly trimming rate cut expectations throughout the year, lowering from an initial 150 basis points to just 90 basis points. However, the euro has not gained much as other banks, including the Fed, have also scaled back in light of recent data.

While acknowledging improving inflation but stopping short of commenting on future policy, the ECB maintaining its current stance would likely be consistent with its increasingly less dovish outlook. That said, some traders may still feel disappointed if the bank does not provide more definitive policy guidance.​

EURUSD in a Range

The EURUSD currency pair is consolidating between 1.0795 and 1.0889. The recent failure to advance beyond the upper threshold has increased the potential for a reversal towards the lower end of the range. Should the top prove untenable following a rejection at the bottom or a simple pullback, the focus above 1.09 will shift to 1.095. A loss of support could precipitate a bearish leg towards 1.0710 should the swing support at 1.0768 falter.​

Source: SpreadEx / EURUSD

Key Takeaways

The ECB is expected to maintain its wait-and-see stance at its upcoming meeting as inflation has continued to decline gradually but remains above its 2% target. While acknowledging improving inflation, the bank is likely to keep a close eye on May's wage data before considering cutting rates. Most analysts expect the first rate cut in or after June, but some suggest a dovish tweak in its communication to prepare the markets for easing.