ECB Expected to Cut Rates

The ECB is expected to take the unusual step of cutting some of its interest rates more than other banks, reflecting the ongoing pressure facing the Eurozone economy and decreasing inflation levels.

A Significant Day for Banks

The ECB is universally expected to lower its key rates by 0.25%. However, the ECB's policy-setting committee debates the near-term outlook for the Eurozone and the most appropriate policy actions in the coming months. Nevertheless, the ECB will provide updated economic forecasts during its meeting, which are important for signaling future interest rate decisions. It is also widely believed that the ECB will make technical adjustments to its main refinancing rates, reducing the differences between its three rates. This aims to pre-empt potential impacts from balance sheet adjustments.

Ahead of the meeting, EURUSD remains on tenterhooks as more doubts have emerged around the scale of interest rate reductions through the end of the year. Most economists now forecast two cuts (including September), down from three previously expected, while the Fed is projected to lower rates three times, not four as earlier expected, keeping trading largely sideways so far this month.​

Focus on the Key Moving Parts

Markets are currently pricing in one interest rate cut in December following Thursday's decision. Investors will likely be interested to see confirmation of this in President Christine Lagarde's post-decision media presser. Maintaining a data-dependent stance would likely satisfy markets, as it is understood that data currently points towards the need for further easing. Previous staff projections shortened the timeline for when the inflation target would be achieved, with further reductions in both inflation and economic growth supporting additional easing measures.

Inflation fell to 2.2%, its lowest level since mid-2021, though prices in the services sector remain persistently high. The ECB's mandate relates to overall inflation though, not just services prices. Therefore, recent reports of sluggish or slowing economic growth may take precedence and lead the central bank towards more easing. Investors will likely look for commentary in this direction, as it could show which side of the inflation versus growth debate holds most influence within the ECB. The euro could weaken if the ECB appears more concerned about economic growth, or strengthen if discussion focuses on inflation.​

EURUSD Slides Within Basic Trend

The EURUSD pair has retreated back inside its basic trend channel, potentially exposing it to additional decreases towards the 1.095 swing and the lower boundary around 1.09 though 1.10. A rebound may be seen instead if buyers can swiftly regain control of the 1.1155 resistance by clearing the 1.11 mark.​

Source: SpreadEx / EURUSD

Key Takeaways

The ECB is expected to cut some interest rates more than other central banks to address ongoing pressures on the Eurozone economy and decreasing inflation. The meeting will provide updated economic forecasts and the bank's balance sheet. Markets are pricing in one more rate cut in December following Thursday's cut and will look for confirmation of Lagrade's data-dependent stance. However, with inflation slowing, economic growth may take precedence, leading to further easing measures, especially if the ECB expresses concern over recent growth reports.​