- 25bps Rate cut fully priced in by markets
- No new staff economic projections, next due in December
- Limited forward guidance; meeting-by-meeting, data dependent stance predicted
Stagnation in the eurozone has hit the euro recently, with selling throughout most of October. It doesn’t seem like the ECB meeting will help the single currency. Expectations are for the bank to lower the deposit rate by 25bps to 3.25%. Growth is even weaker than the ECB’s downwardly revised September forecasts, and inflation is coming back to target sooner than the end of next year’s staff forecast. Crucially, there is little apparent opposition from the Governing Council to further easing on Thursday. Even some hawkish members of the ECB have recently said that the bank cannot ignore the headwinds to growth.
All change in recent weeks
The economic outlook has shifted somewhat since the previous meeting when it was presumed the ECB would opt to lower rates in a gradual, measured manner, only at meetings that are accompanied by quarterly macro projections, whilst pausing at those that do not publish them. As a reminder, the bank cut rates in June, paused in July and cut in September. The first wave of market repricing for October was driven by the September PMI data which saw manufacturing slip further into contractionary territory and services decline, which meant the composite was dragged into contractionary territory; suffering its largest decline in 15 months.
The latest inflation data added to the dovishness with the headline slipping below the ECB’s 2% target for the first time in three years, to 1.8% from 2.2%, even though super-core inflation only dropped one-tenth to 2.7%. Services inflation stands at a still elevated 4%. But importantly, momentum in the latter metric declined significantly as service prices rose only 0.1% m/m, which was the lowest monthly rate this year.
Market pricing
Looking beyond October, a further 25bps cut is near-enough fully priced in for December with four back-to-back cuts expected from this week’s meeting, with a terminal rate of 2% next summer. Certainly, this back-to-back move will signal a pivot to a faster easing cycle.
But expectations are that the Governing Council and President Lagarde will not offer any forward guidance due to the uncertainty ahead. That comes in the form of many variables including certain still sticky inflation components like wage growth, the path of oil prices and the outcome of the US election.
Market impact
Any talk of the risk of an inflation undershoot, the job market weakening and rates being called restrictive will govern the size of a possible euro sell-off. These would be dovish hints that more rate cuts are coming and confirm an easier incoming rate path. On a wider level, less supportive rate differentials, instability in risk sentiment, geopolitical tensions, and US election tail risks point to EUR/USD possibly remaining under pressure in
the short term.
The major has been suffering recently, down 12 days out of the last 14. Having lost support around 1.09, the next downside level of interest sits at 1.0832. On the flip side, a steadfast ECB and a more gradual pace of easing may see the single currency supported. Full visibility on economic trends, especially the labour market and wage growth appear tricky at present, which might mean President Lagarde gives very little away, which is less dovish.