There is a solid consensus that the ECB will hold rates unchanged at the end of its policy meeting on Thursday, 11 September. Inflation is almost exactly on target, and the Euroarea economy is projected to grow steadily. But uncertainty around trade and the political situation in France could leave markets a bit nervous.
One potential surprise for the markets could come from the updated economic forecasts. The ECB does this each quarter and will do so again concurrently with the September rate decision. The consensus among economists is that the estimates will remain unchanged. However, if there is a significant shift in the outlook, it could indicate that the ECB might become more hawkish or dovish, depending on the change.
Growth Concerns Remain
At the last meeting, the GDP growth outlook was raised to 1.2% for this year. That helped shift the perception among economists that the ECB wouldn’t cut rates again. A further hike in projections, with inflation just above the target, could mean the central bank will turn hawkish. On the other hand, if the forecasts are cut back, then it could be a sign of dovishness.
During her post-rate decision press conference at the last meeting, ECB President Christine Lagarde said that the bank was “in a good place”. But, she also stressed that there were a series of risks to the outlook and emphasised a high level of uncertainty. She specifically addressed the tariff issue. But, since then, the EU and the US reached a trade deal that avoided the risk of retaliatory tariffs from Brussels. Consequently, some of the uncertainty should have diminished, at least for the ECB.
What Could Affect the Outlook
Around 60% of economists in a recent Reuters survey said they expected no more rate cuts for the rest of the year. This is in contrast to the market, which is pricing in a rate cut in December. These forecasts, however, rely on the current situation remaining stable for the next four months. The political situation in France is a significant risk factor that could disrupt those projections. The ECB will not address it directly, but Lagarde might be more cautious about the economic outlook, leaving markets with a more dovish impression.
The ECB’s staff projections see inflation staying at 2.0% this year and falling to 1.8% next year. They also expect the Eurozone economy to accelerate modestly to 1.4% growth. However, this relies on European governments stepping up spending on defence this year, including Germany, which is only just starting debate in its legislature around its pledge to increase spending.
How the Market Could React
The main issue for the EURUSD is the difference between the Fed and the ECB. While the European Central Bank is expected to leave rates unchanged, the Fed is anticipated to restart its easing cycle, cutting rates by at least 25 bps a week after the ECB meeting. This means the interest rate gap could start to close, making the Euro relatively more attractive.
If the ECB convinces the market that it will keep rates unchanged, while the Fed comes out more dovish than expected, this could give the EURUSD a substantial boost. But if the ECB opens the door to a rate cut this year, then the Euro could weaken against the dollar.
