Euro Ignores the ECB Rate Cut, With No Hints for More Cuts

Yesterday the BOC delivered the first rate cut since the hiking began, while today the ECB was widely expected to cut interest rates by 25 bps. Despite that being a done deal, the Euro didn’t shown particular weakness in the day leading to the ECB meeting, as markets were more concentrated on the future policy, whether there would be more rate cuts coming up in Q2 and in 2025. But, with no commitment from them as Lagarde pointed out, the Euro bulls are back on the game.

The shift towards rate decreases in the Eurozone, against a backdrop of considerable inflation progress, was not a surprise as everyone saw it coming. While the headline CPI (Consumer Price Index) rate has fallen from a record high of 10.6% in October 2022 to 2.6% in May 2024, the question of what happens next remains complex.

EUR/USD Chart H4 – Not Much Action After the ECB

Besides improvements in inflation in European countries, the Eurozone economy continues to face challenges, with growth remaining sluggish. This suggests that underlying economic conditions are weak and do not support elevated interest rates for long periods of time. Certain forward-looking indicators suggest that wage growth may slow over time. This could further alleviate inflationary pressures in the future which would mean more rate cuts by the ECB, however, markets were on standstill until the ECB meeting, with EUR/USD mainly following the price action of the USD.

European Central Bank Interest Rate Policy Decision

Key Rate Changes:

1. Main Refinancing Rate:
   • Current: 4.25% (as expected)
   • Prior: 4.50%
2. Deposit Facility Rate:
   • Current: 3.75% (as expected)
   • Prior: 4.00%
3. Marginal Lending Facility:
   • Current: 4.50%
   • Prior: 4.75%

Policy Approach:

• Inflation Target: The ECB remains determined to ensure that inflation returns to its 2% medium-term target in a timely manner.
• Policy Rates: The ECB will keep policy rates sufficiently restrictive for as long as necessary to achieve the inflation target.
• Data-Dependent Approach: The ECB will continue to follow a data-dependent and meeting-by-meeting approach, without pre-committing to a specific rate path.
• Securities Holdings Reduction: The ECB plans to reduce holdings of securities under the Pandemic Emergency Purchase Programme (PEPP) by €7.5 billion per month on average in the second half of 2024.
• Readiness to Adjust: The ECB stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term.

Forecasts:

1. Economic Growth:
   • 2024: 0.9%
   • 2025: 1.4%
   • 2026: 1.6%
2. Inflation:
   • 2024: 2.5%
   • 2025: 2.2%
   • 2026: 1.9%
3. Core Inflation:
   • 2024: 2.8%
   • 2025: 2.2%
   • 2026: 2.0%

Analysis:

Interest Rates:

• The ECB has lowered its main refinancing rate and the marginal lending facility rate, indicating a shift towards a slightly less restrictive monetary policy stance, while the deposit facility rate was also reduced, aligning with expectations.
• These adjustments suggest the ECB is balancing between combating inflation and supporting economic growth.

Inflation Target:

• The ECB’s commitment to returning inflation to the 2% target shows a continued focus on price stability. The gradual reduction in inflation forecasts aligns with this goal, moving from 2.5% in 2024 to 1.9% in 2026.
• Core inflation is also expected to decrease steadily, reaching the target by 2026.

Economic Growth:

• The ECB’s growth forecasts indicate a modest pickup in economic activity over the next few years. The gradual improvement in growth rates from 0.9% in 2024 to 1.6% in 2026 suggests cautious optimism about the Eurozone’s economic prospects.

Policy Measures:

• The decision to reduce PEPP holdings reflects a cautious unwinding of pandemic-related support, aiming to normalize monetary policy while still providing support to the economy.
• The ECB’s readiness to adjust its instruments as needed shows flexibility and responsiveness to changing economic conditions.

Market Implications:

1. Currency Impact:
   • The reduction in interest rates could lead to a weakening of the Euro as lower rates typically reduce the attractiveness of a currency.
2. Bond Markets:
   • Reducing PEPP holdings could put upward pressure on Eurozone bond yields as the central bank reduces its market presence.
3. Economic Outlook:
   • The ECB’s cautious approach suggests a measured response to economic conditions, supporting growth while ensuring inflation targets are met.
4. Investor Sentiment:
   • The data-dependent and flexible approach may reassure investors that the ECB is committed to maintaining economic stability.

EUR/USD Live Chart

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Skerdian Meta

Lead Analyst

Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.

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