The European Central Bank (ECB) is widely expected to cut rates by a quarter of a point at the end of its meeting on Thursday. The question that could move markets is what happens after that. There is a fair consensus that the July meeting will be a pause. But, if the ECB doesn’t provide clear communication, it could lead to some interesting volatility in Euro pairs.
The consensus for a rate cut was firmed up at the start of the week when flash May CPI came in below expectations and below target. Analysts were expecting headline inflation to hit the ECB’s objective of 2.0%, but it fell below that to 1.9%. The core rate was also lower than expected, but a bit higher at 2.3% instead of the 2.4% forecast.
So, Why No More Cutting?
That the inflation rate keeps coming down even as the central bank keeps easing normally would signal that even more cuts were coming. But, the expectation is that inflation will bottom out and actually start rising a bit in the summer. That’s at least according to the ECB’s own projections, which are what the central bank will use for deciding monetary policy.
One of the things that could move the market, therefore, is if the European Central Bank (ECB) cuts its inflation outlook again. This would likely be interpreted as opening up the possibility for more rate cuts going forward. The market is currently pricing in only one more rate cut for the rest of the year, some time in autumn. Which means at least two more rate decisions without any movement from the ECB.
Keeping Things Uncertain
Markets would probably like to see some clear indication of future holds or cuts either in the monetary policy report or in President Christine Lagarde’s press conference. But, it’s likely that there will be continued haziness about future projections. Lagarde and other MPC members have been repeating that the tariff situation provides uncertainty about the future, making policy outlook hard to estimate. That means the ECB could leave the door open for a rate cut in July, but the market might estimate that is just part of the uncertainty rhetoric.
What could provide some directionality is comments on the neutral rate. That is when monetary policy is neither restrictive nor stimulative to the economy, and is where the European Central Bank (ECB) is trying to get to. If Lagarde implies that the neutral rate is near or has been achieved, the market would likely see that as an indication that the ECB will pause. If, instead, she emphasizes economic uncertainty, then the market could interpret that as a sign that further easing could be more likely.
How Will it Affect the Euro
Usually a rate cut would weaken a currency. But with the trade uncertainty around the dollar, the Euro has actually been gaining despite a widening interest rate gap between the European Central Bank (ECB) and the Fed. Which means that announcements around trade could have a bigger effect on the EURUSD than the rate decision.
The dollar has weakened around 8% since the start of the year, which is the bulk of the gains in the Euro against the dollar. A reversal of that trend would likely come from a change in the conditions in the US that would help support the dollar, rather than moves on the Euro side.
