ECB Set for Cut, Eyes on Growth Projections

The EURUSD faces a pivotal moment as the ECB readies for a well-expected rate cut priced in at 97%, setting the stage for further easing into 2025.

Turmoil at the Front

While price stability and inflation are critical to the ECB, markets have shifted focus to issues that could sway the policy decision as the potential for US tariffs and political uncertainty in Europe weigh heavily on sentiment. French President Emmanuel Macron continues deliberating over the appointment of a Prime Minister, while German Chancellor Scholz confronts a no-confidence vote on Monday. These headwinds have prompted a minority of economists to consider the possibility of a 50 basis point cut, with markets pricing in up to 150 basis points of easing by the end of next year. However, economists project a more modest 100 basis points.

The expected reduction on Thursday would mark the fourth rate cut in the current easing cycle, positioning the ECB among the most aggressive major central banks. Markets currently price in just a 10% probability of a 50 basis points cut. The consensus 25-basis-point view indicates the accompanying statement and press conference will emphasise that further easing is in the cards as the European economy edges towards stagnation.

Growth Concerns Take Centre Stage

Analysts increasingly suggest the ECB has moved beyond its inflation focus to address economic slowdown risks. This shift could trigger a return to the pre-pandemic challenge of persistently low inflation and growth. Several Governing Council members have advocated for considering a 50-basis point cut. Even noted hawks like Austria's Robert Holzmann have acknowledged the need for easing, though stopping short of backing a double cut.

The meeting comes as the EURUSD has found some stability after a 2-month decline amplified by US election developments. The shared economy accelerated to 0.4% quarterly growth in Q3, its fastest pace in two years, potentially helping stave off the US-European growth gap that had undermined the outlook. This suggests that traders will likely scrutinise the ECB's latest projections for economic growth for further direction.

EURUSD in Flag or iH&S

The EURUSD pair might have formed a bearish flag pattern, hinting at further declines below the 1.0400 handle and towards 1.0330 and beyond. However, if the 1.0455-1.0500 region holds strong, the pair could have completed the right shoulder of an inverse head-and-shoulders (H&S) pattern pointing to a bottom. In that scenario, upside resistance above the swing high of 1.0634 lies at the 61.8% Fibonacci retracement of the 1.0936-1.0330 leg at 1.0705, followed by the 79% retracement at 1.0805.​

Source: SpreadEx / EURUSD

Key Takeaways

The ECB is expected to cut interest rates with a 97% probability, the fourth in the current easing cycle, positioning the ECB among the most aggressive major central banks. As the focus has shifted towards addressing economic slowdown risks and the potential impact of US tariffs and political uncertainty in Europe, some economists suggest a 50 basis point cut is possible. However, this is only priced in at 10%, with analysts pointing to the ECB's latest economic growth projections as the economy edges towards stagnation, especially after EURUSD found some stability after a 2-month decline.