Both markets and economists agree that the ECB will cut interest rates by 25 bps at the conclusion of its policy meeting on Thursday. So, the issue that will move the markets will be if there is any indication for what will happen after that. There seems to be quite a lot of disagreement among traders and analysts, being that the EURUSD could move either way depending on what happens.
The thing is, the ECB has been going on back-to-back rate cuts for months now. Meanwhile, inflation rose through the course of the winter. The increase in consumer prices was widely expected by officials, which is why they kept easing. Now that we have flash figures for February, it seems that inflation has turned around and is heading back towards the 2.0% target.
Time for a Pause?
Ahead of the meeting, it appeared that there were members of the ECB’s monetary policy committee that were pushing for having a debate on when to pause rates. With inflation above the target rate (2.4% vs 2.0% being sought), and six rate cuts under the belt, it might provide a good time to pause. If inflation continues to lower as expected, then it might be harder to make the case for a pause in the coming months, which is why the hawks could use this meeting to push for no cut in April.
Economists agree that after this upcoming cut, there will be two more cuts this year, likely before July. That leaves relatively little room to have a pause, as well. Analysts note that it seems there is a consensus about where rates should go, with the ECB seeing 2.0% as the neutral rate they want to have when inflation hits the target (which, coincidentally, is also 2.0%). The difference in opinion is on how fast to get there, with northern countries wanting a shallower slope.
It’s All Down to the Comments
With that in mind, markets are likely to be going through ECB President Christine Lagarde’s post rate decision comments. There doesn’t seem to be a consensus among traders about whether there will be a rate cut at the next meeting or not. Therefore, comments that reinforce the idea of a pause, that’s appropriate to evaluate the situation, or that more data is needed, will likely give the Euro a bit of a boost.
On the other hand, maybe Lagarde keeps her current rhetoric about being on track to reach the inflation targets. She could say she’s concerned about economic growth. In that case, the market could come to the conclusion that the hawks are in the minority, and another rate cut is coming in April. This could end up weakening the Euro.
Where the Currency Pair is Going
A lot of the recent price action for the EURUSD has been related to the threat of tariffs. Lagarde is likely to suggest tariffs will be a drag on the economy. The uncertainty around the application of levies has left traders staying out of riskier assets, and buying up bonds. This has put extra pressure on the dollar, as its bonds are seen as safer than Europe’s.
The resulting widening of the yield gap between the two currencies has largely benefitted the Euro, keeping it from moving away from parity despite expectations of further rate cuts from the ECB. The prospect of Europe having to borrow more money to support Ukraine is also keeping yields elevated. Once there is more clarity on what the ECB will do at the next meeting, then the EURUSD could settle into a groove.
