Expectations are for the ECB to cut the deposit rate by 25bps to 2.25%. This move was sealed after the Liberation Day tariff announcements, but with so much uncertainty around, there may be little guidance given by the Governing Council in its statement and President Lagarde in her press conference. Markets see a terminal rate of around 1.75% in the fourth quarter with a small chance of further moves into more accommodative territory.
The backdrop to the meeting has obviously been dominated by US President Trump’s trade agenda. Currently, he has announced a 90-day pause in tariff actions and cut reciprocals to 10% for nations that asked for talks. Reports suggest that the EU is considering pausing its countermeasures on the US (due April 15th) for 90 days. Overall, the outlook for trade has improved over the past few sessions, however, it remains highly uncertain and therefore continues to suppress the growth outlook for the region.
That means policymakers are set to take action by loosening monetary policy further. The statement is likely to reiterate that monetary policy is becoming meaningfully less restrictive and the central bank will continue to follow a data-dependent and meeting-by-meeting approach. Any additional language or guidance given, due to the ongoing trade war, would be a surprise. The upcoming meeting will not be accompanied by macro forecasts.
Market pricing and EUR
Money markets have been particularly choppy given the volatility in markets about the ECB’s next rate moves. However, the next 25bps reduction is fully priced by the summer with roughly 75bps of easing implied by year-end. Regarding the euro, the ECB probably won’t like the reality that the trade-weighted single currency is surging to multi-decade highs, yet it will also acknowledge its benefit and safe haven properties of the second most liquid currency in the world. This will have some longer-term benefits for eurozone borrowing costs.
EUR/USD has inevitably been volatile amid all the tariff on-off news and headlines. It has been broadly bid with the loss of confidence in the dollar and the “Sell America” theme benefitting euro asset markets. Indeed, if this were to play out more extensively, the single currency would be one of the few available to absorb any exodus from US assets. A modestly better outlook for world trade should further help the euro, while it seems the EU isn’t willing to escalate its trade war with the US for now.
The weekly EUR/USD chart shows that the strong bullish rally has broken a long-term down trendline from the 2008 highs. Prices are also just above a major Fibonacci retracement level (61.8%) of the January 2021high to September 2022 low at 1.1274. Bullish momentum is obviously strong, if a little overbought on some momentum indicators. The major is trading way over any levels that short-term rate differentials would suggest. There might not much standing in the way of a move to 1.15, with the recent top at 1.1473 and support just below 1.13.