ECB Expected to Cut Rates Amid Trade War Uncertainty

Despite the ongoing trade tensions, the ECB is expected to cut interest rates again, though some analysts are not entirely sure about the extent of the rate cut. 

A Final Slice to the Rates? 

The ECB seemed poised for a pause after six consecutive rate cuts, but the trade war has left markets uncertain about the central bank's next move. Although futures and economists agree that another rate cut is coming, they do so with significant caveats. Meanwhile, the market reaction is not just about monetary policy but also implications for future central bank actions. However, this might be left in the air due to the unpredictability of US President Trump's trade policy and central bankers acknowledging that the market is not behaving according to their models. 

In a poll conducted after the tariff rollout but before the 90-day pause was announced, 86% of economists predicted a rate cut at the upcoming ECB meeting. After that, a smaller majority expects only one more rate cut for the rest of the year, scheduled for June. This differs from the market, pricing in three rate cuts for the remainder of the year, but does agree on easing at the upcoming meeting followed by a pause. Another matter is whether ECB President Christine Lagarde supports this idea with her post-rate decision rhetoric. 

Growth, Expectations and Cuts 

The euro has risen over 7% against the dollar this year, as the greenback is hurt by market turmoil, and analysts speculate that the single currency is emerging as an alternative safe-haven asset. The strong euro is seen as doing the ECB's job, lowering import costs and, with it, inflation. This, in turn, gives the shared central bank more room to ease to prop up the fledgling economy. After a substantial burst in optimism following earlier announcements of increased fiscal spending, the euro also benefitted from higher interest rates. However, since the start of the week, bund yields have been on the back foot as investors seek safety, and if combined with more easing, the euro could face downward pressure. 

The highly fluid economic situation means that the ECB will hesitate to provide forward guidance, which could cause erratic trading as markets try to figure out if another rate cut is coming in May. With the trade wars seen weighing on the economic outlook and fears of inflation potentially being overblown as the tariffs keep getting paused, there is room for the ECB to ease. On the other hand, the trade situation could be resolved relatively quickly, followed by an economic rebound that would leave the ECB in an overly accommodative position. 

EURUSD in Consolidation 

Fibre appears to be forming a consolidation pattern between 1.1243 and 1.1425-1.1474, keeping the door open for a potential move towards the 1.16 level should bulls take over 1.15. However, a break below the 1.1265 regional support could pave the way for a decline towards 1.1147 and perhaps back to 1.10. 

Source: SpreadEx / EURUSD 

Key Takeaways 

Markets and economists expect the ECB to cut rates amid trade war uncertainty, but the extent of the rate cut remains unclear. The central bank's forward guidance and what the markets will make out of it will be crucial, as will the trade war development and its impact on economic growth and inflation expectations.