Anticipation Builds for ECB Rate Decision

It is broadly anticipated that the ECB will cut interest rates at its meeting this Thursday as economic growth across the eurozone has shown signs of slowing while worries around price pressures continue.​

Market Expectations and Future Guidance

The market expects the ECB to cut interest rates for the third time this cycle to 3.5%, widening the gap with other central banks. September flash CPI fell below the bank's target of 2.0% at 1.8% ahead of schedule, as the ECB had forecast this milestone wouldn't be reached until next year. Lower price pressure has accompanied signs of economic weakness, such as PMIs being persistently in contraction and Germany likely already in recession. While the final consumer price figures will only become available on the rate decision day, they are unlikely to differ significantly. Understanding where the economy is headed will come with forthcoming GDP figures. Still, investors believe there is sufficient support for more dovish monetary policymakers to enact an interest rate cut.

What comes after is still debated, with the market likely focusing on future guidance from the ECB. With other central banks expected to cut rates once per meeting for the remainder of the year, investors will likely look for similar signals. However, factors merit an expectation that the ECB could take a more cautious approach, firmly sticking to being "data dependent." These include higher energy prices in prior months, with the risk of conflict in the Middle East pushing prices higher.​

Interpreting Recent Data Trends

The market reaction may follow an interpretation of recent data trends. If ECB President Christine Lagarde maintains her data-dependent rhetoric, the market could view this as a dovish sentiment given the increasingly negative data. Persistently high core inflation had been the main obstacle to further easing, as the services sector remained resilient. However, the September composite PMI fell into contraction, indicating an economic slowdown dragging on the services component and inflation.

Analysts noted Lagarde's comments in late September parliament appeared more dovish, expressing confidence inflation will reach its target in a "timely" manner. This differed from her previous reference to a "gradual approach." However, as the ECB normalises policy post-pandemic, it signals a return to low inflation, low rates and low growth as seen during Mario Draghi's tenure. Some analysts see signs of economic contraction prompting accelerated ECB rate cuts through 2025. Meanwhile, doubts grow whether the Fed will cut as aggressively as expected as the US economy keeps growing. The widening interest rate gap could persist, though only time will determine if the difference pushes the eurodollar back to parity.​

EURUSD at Critical Junction

The EURUSD currency pair has decreased since reaching a high point twice at 1.12 and may continue declining towards 1.077. If 1.0667 is broken through, this could allow for a further decrease to 1.06, potentially forming a double bottom pattern. Conversely, if the support at 1.09 holds strong, prices may bounce towards 1.10 and subsequently rise higher over time.

Source: SpreadEx / EURUSD

Key Takeaways

The ECB is expected to cut interest rates at its meeting due to slowing growth and undershooting inflation, resulting in a wider gap with other central banks. Future guidance will be key as investors watch for signals of further easing. However, the ECB may be more cautious due to the recent increase in energy prices. Still, the market reaction will depend on comments from ECB President Lagarde and interpretations of weakening economic data. Some analysts foresee accelerated ECB rate cuts through 2025 to counter low inflation, growth and rates.​