Economists are unanimous in their expectations that the ECB will keep rates unchanged on Thursday at the conclusion of its policy meeting. After all, the June CPI report for the Eurozone showed inflation was precisely on target at 2.0%. Given the strong consensus, traders will focus on what to expect at the next meeting.
Those hoping for clarity will likely be disappointed, however. ECB officials have been pretty adamant in sticking to the “uncertainty” narrative, so it’s unlikely the central bank will provide any concrete guidance for the next meeting. It is also not scheduled to update its macroeconomic outlook at this meeting, leaving the policy forecast somewhat unclear. However, this might not cause significant market volatility, as the outcome is likely already priced in, given how clearly it has been telegraphed.
What’s Moving the Market
The rate decision comes in the middle of intense and possibly last-minute trade negotiations between the US and the EU. US President Donald Trump has threatened the bloc with tariffs of up to 50%, which is significantly higher than the “worst case” scenario that the ECB had factored into its forecasts. If a deal isn’t made, it could alter the outlook for monetary policy, but this will not be known until after this meeting.
Consequently, news or even rumours about the trade talks between Brussels and Washington could have a bigger impact on the markets. The effect of a trade war is expected to be different on either side of the Atlantic, and that has been pushing the Euro higher this year.
How High is Too High
The EURUSD has risen 15% in the first half of this year, the fastest rate since the pandemic. It has even gotten the notice of ECB officials, such as Vice President Luis de Guidos, who warned earlier this month that a rate above 1.2000 would cause “complications”.
For a central bank fighting high inflation, a strong currency is typically beneficial, since it has a deflationary effect. However, now that CPI growth in the EU is under control, a rapidly appreciating Euro could mean that inflation threatens to fall below target. One way a central bank can address this is by lowering rates and supporting the economy. An option that could be particularly appealing if a trade deal is not met, since the ECB estimates it would slow the shared economy by at least 0.3%.
What to Look Out For
The recent pullback in the Euro might be enough for the issue of its strength to be mentioned in the Monetary Policy Statement. In fact, most analysts believe that the July version of the statement will be essentially the same as the one from the last meeting, with a strong emphasis on uncertainty.
A slight majority of economists expect the ECB to cut rates in September. By pointing to uncertainty, the central bank can keep the door open for a rate cut at the next meeting, if the trade negotiations don’t go well.