Tomorrow is the first ECB meeting of the new year, and investors will be keen to see if there are any signs for when the dovish pivot will happen. Members of the shared central bank have been trying to counter speculation of a turn towards easing. But the latest data suggests that such a move is now just a matter of when. And economists are increasingly suggesting that the ECB will turn to easing sooner and more aggressively than anticipated.

There still is a general sensation that the ECB will mirror its easing path compared to other central banks. That is, since the slope of tightening was slower than other major economies, the downward trajectory will also be softer. That is assuming no major economic event that would require emergency slashing of the rates. After all, since the shared central bank didn’t manage to tighten as much as others, it has less room to cut before falling back into negative rates.

What the Market is Expecting

Going into the ECB meeting, the market is pricing the chance of up to four rate cuts this year. That contrasts with six rate cuts priced in for the Fed. But economists have been saying that might actually not be enough, and the ECB’s loosening will happen sooner and faster than the market currently anticipates. That’s a somewhat unusual position, since typically economists tend to be more cautious and reserved than traders.

There is a small minority of economists who think that the first rate cut could happen as soon as March. But the consensus is that the ECB will move to full-on easing mode sometime in the second quarter. That expectation is contributing to the weakness in the Euro. By the end of the current quarter, there will be another crop of economic data. And economists are now warning that the rebound expected of Europe after last year’s at best stagnation won’t be happening through the winter. That means inflation and economic growth is expected to keep falling through the coming months, and might only recover once the ECB moves to easing mode, according to a majority of economists.

Putting the House in Order

The problem for the ECB is that core inflation is still above target, while the economy just isn’t performing. That means for now it has to keep leaning on the hawkish messaging in order to keep inflation expectations “anchored”, to use the monetarists’ term. Traders will be looking to see if there are any rhetorical cracks that suggest the ECB is moving towards a pivot

One of the things operating on the shared central bank’s side, though, is that its mandate is only for price stability. It doesn’t have any requirement to support the economy. Which could give it more room to keep tightening even if the economic data is poor. But economic growth and inflation have a symbiotic relationship. If the economy is slowing down, then inflation should fall faster.

What to Look Out For

After the last meeting, ECB President Christine Lagarde said that there was no talk of cutting rates, in order to showcase the bank’s commitment to tightening for now. An admission to actually discussing the possibility of a cut might be interpreted as a significant dovish sign by the market.

The ECB has said so far that inflation is not expected to come down to target until next year. That would imply that rates would stay high until then. Another way the ECB could show dovishness is to suggest that inflation might reach its target sooner than expected.

Of course there’s always the possibility that the ECB might stick to its guns. With the Fed already open about cutting rates this year, this could surprise the market a bit, and give the Euro a little boost.

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