- The European Central Bank is set to cut interest rates by 25 bps on Thursday.
- ECB President Christine Lagarde could stick to a data-dependent stance on future rate outlook.
- The Euro’s fate hinges on the ECB’s updated forecasts and Lagarde’s speech.
The European Central Bank (ECB) is set to announce its first interest rate cut since 2019 on Thursday at 12:15 GMT.
The updated staff economic projections will be published alongside the interest rate announcement. ECB President Christine Lagarde’s press conference will follow at 12:45 GMT.
What to expect from the European Central Bank interest rate decision?
A 25 basis points (bps) reduction to the benchmark Deposit Facility Rate is fully baked in, following the conclusion of the Governing Council’s June monetary policy meeting, which will bring down the borrowing cost from a historic high of 4.0% to 3.75%.
Several ECB policymakers have long promised a rate cut in June. Therefore, the main focus will be on the central bank’s communication on the path forward on interest rates. Market participants will closely scrutinize the language in the policy statement, as well as ECB President Christine Lagarde’s words during the press conference to gauge the scope and timing of the next rate cuts this year.
Although the Eurozone’s inflation has come close to the central bank’s 2.0% target, the sticky services inflation (back above 4.0% annually in May) raised expectations that the ECB won’t embark upon an aggressive easing cycle. Meanwhile, Eurozone annual inflation rose from 2.4% in April to 2.6% in May, beating the forecast for a 2.5% increase.
Further, a strong economic recovery and a tight labor market in the old continent will likely compel the ECB to refrain from committing to additional rate cuts in the meetings beyond June.
Lagarde could, therefore, stick to the Bank’s data-dependent stance and avoid providing any guidance on the policy outlook.
“I think they will be far less prescriptive about what comes next than they have been around the June meeting,” said BNP Paribas’ chief Europe economist Paul Hollingsworth in a research note.
Markets are expecting fewer than 60 bps of cuts this year, implying two moves and less than a 50% chance of a third one. This is down from three rate cuts projected when the ECB last met in April and at least five rate cuts expected in 2024 in January, according to Reuters.
How could the ECB meeting impact EUR/USD?
Heading into the ECB showdown, the Euro is consolidating below a three-month top of 1.0916. The US Dollar (USD) struggles to sustain the upside momentum amid the revival of bets for a Federal Reserve (Fed) interest rate cut in September after weak US ISM Manufacturing PMI data for May.
ECB President Christine Lagarde’s non-commital stance on the timing of the next rate cut could add extra legs to the EUR/USD recovery, as it would imply that the Bank could maintain rates higher for longer amid the persistence of inflation.
On the other hand, if Lagarde dismisses concerns about sticky inflation, it could be read as a bit dovish by market participants, eventually rendering negative for the EUR/USD pair.
Dhwani Mehta, FXStreet’s Senior Analyst, offers a brief technical outlook for trading the Euro on the ECB policy announcements: “EUR/USD extends its battle at around the stiff resistance near 1.0890, suggesting that buyers are gathering strength. The 14-day Relative Strength Index (RSI) holds strongly above the midline, near 60, adding credence to the pair’s upside potential.”
“Acceptance above the 1.0950 level is critical to unleashing further upside towards the 1.1000 psychological level. EUR buyers will then aim for the static resistance at 1.1050. Conversely, the initial demand area is seen around the 21-day Simple Moving Average (SMA) at 1.0833, below which the 1.0800 support could be tested. The 100-day SMA aligns at that level. Further south, the confluence zone of the 50-day SMA and the 200-day SMA near 1.0775 could act as a tough nut to crack for Euro sellers,” Dhwani adds.
Economic Indicator
ECB’s President Lagarde speech
The European Central Bank’s President Christine Lagarde, born in 1956 in France, has formerly served as Managing Director of the International Monetary Fund, and minister of finance in France. She began her eight-year term at the helm of the ECB in November 2019. As part of her job in the Governing Council, Lagarde holds press conferences in detailing how the ECB observes the current and future state of the European economy. Her comments may positively or negatively the Euro’s trend in the short term. Usually, a hawkish outlook boosts the Euro (bullish), while a dovish one weighs on the common currency (bearish).
Next release: Fri Jun 07, 2024 14:15
Frequency: Irregular
Consensus: –
Previous: –
Source: European Central Bank
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
