ECB still on course to cut rates this week?
Recent inflation data has dimmed hopes that the European Central Bank will cut rates this week.
ECB still expected to cut rates
The European Central Bank (ECB) meeting on Thursday is widely expected to result in a 25-basis point (bp) interest rate cut. This would mark the first time in ECB history that it has cut rates before the Federal Reserve (Fed).
However, the euro is unlikely to sell off solely due to this largely priced-in 25bp rate cut itself. The bigger market influence will come from the ECB's forward guidance on potential future rate cuts, which President Christine Lagarde will likely characterise as fully data dependent.
Staff projections to influence FX moves
The updated ECB staff economic projections could also impact the euro's reaction. Current market pricing suggests one additional 25bp rate cut may come later this year, either at the October or December meeting.
What if they don’t cut?
However, there are concerns about what could happen if the bank surprises by deciding not to cut rates as expected, fears fuelled by last week’s stronger eurozone inflation data. While ECB President Christine Lagarde has been laying the groundwork for a rate reduction in June, recent data has cooled enthusiasm about the future path of rates after an initial cut.
If the ECB defies market expectations and leaves rates unchanged on 6 June, it could trigger a fall in stock and bond prices according to analysts. Longer-duration bonds would likely be most impacted since they are more sensitive to changes in monetary policy expectations. In equity markets, sectors like utilities, real estate, and consumer discretionary companies could see outsized negative impacts from an ECB non-cut due to their sensitivity to interest rates.
Can the ECB diverge from Fed policy?
Another key question is whether the ECB will diverge from the Fed's monetary policy path. Some analysts believe the ECB will act independently based on eurozone economic conditions, even if it means deviating from the Fed. However, others caution that a sharp policy divergence could significantly weaken the euro versus the dollar, potentially forcing the ECB to be more cautious about easing to avoid stoking inflation.
EURUSD – technical analysis
Last week EUR/USD once more bounced off its breached March-to-May downtrend line which, because of inverse polarity, acted as support, together with the 200-day simple moving average (SMA) at $1.0787. While this low underpins, the medium-term uptrend remains intact.
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