ECB meeting preview: no change but future cuts still expected

No new policy signals on the horizon

As markets have already priced in significant interest rate cuts for this year and next, the European Central Bank (ECB) is unlikely to introduce new policy signals at this juncture. The elements of the bank's reaction function are well understood by market participants, with several Governing Council members expressing satisfaction with current market expectations.

Data-dependent approach continues

The ECB is expected to maintain its meeting-by-meeting, data-dependent approach. This meeting will likely focus on reviewing incoming information and discussing survey data from various sources. Key information and new staff projections expected in September will play a crucial role in future decision-making.

Restrictive monetary policy remains necessary

The ECB has consistently guided its policy based on three key criteria: inflation outlook, underlying inflation dynamics, and the strength of monetary policy transmission. Given the anticipated economic recovery in the second half of this year and persistent inflation concerns, a more restrictive monetary policy stance compared to pre-Covid-19 pandemic levels is expected to continue.

Market expectations and ECB intentions

Financial markets are pricing in a gradual easing of monetary policy, while still anticipating a restrictive stance in the coming years. This aligns with the ECB's intention to maintain a tight policy in the months and quarters ahead, as indicated in the June ECB minutes.

Potential impact on EUR/USD

While the ECB meeting itself is not expected to significantly impact EUR/USD, other factors could introduce volatility to the currency pair. These include the upcoming Federal Open Market Committee (FOMC) meeting, new economic data releases, and potential political developments in the United States.

The latest US consumer price index (CPI) and payrolls data has firmly revived hopes that the US central bank, the Federal Reserve, will cut rates in September. The news builds on an already-strong rebound from the June low at $1.067 and has taken the price back to the $1.09 zone that marked the peak in May and early June.

A close above $1.092 would sustain the bullish view and open the way to $1.10. For the moment, short-term trendline support from the June low continues to underpin the price. A close below $1.085 might signal some short-term weakness is at hand.

EUR/USD chart

Expectations and risks to the outlook

Analysts maintain their expectation of no rate cut in September, citing labour market strength and sticky inflation. However, a potential Fed rate cut in September could put pressure on the ECB to follow suit, despite persistent underlying inflation concerns in the eurozone.