ECB preview: caution to prevail as bank expected to leave rates unchanged
While the ECB will be pleased to see a slowdown in the pace of inflation, it will want to avoid hinting at a dramatic change of policy in the near-term.
No changes in ECB policy expected
The upcoming European Central Bank (ECB) meeting is not anticipated to bring any significant changes in policy signals, as there has been limited new information since December. However, President Lagarde is likely to reiterate that the next policy rate change will be a cut, which could potentially occur in the summer.
The June meeting holds potential importance, similar to comments made by ECB Chief Economist Philip Lane. Lagarde is expected to emphasize the significance of the new staff projections in March, which will play a crucial role in determining policy rates.
Markets pricing in April rate cut
According to market expectations, the first ECB policy rate cut is projected to take place in April, with a total reduction of 135 basis points (bp) by the end of 2024. The policy rates are expected to reach a trough of 2% within the next two years.
Despite recent inflation prints showing a slight downside surprise compared to staff projections, the ECB has not declared victory over inflation. The disinflation process continues, supported by easing underlying inflation indicators.
Economic growth concluded 2023 on a weak note, with manufacturing experiencing contractionary territory and services showing modest growth. Although growth momentum remains weak, the ECB anticipates a gradual rebound in activity throughout 2024. This rebound will be supported by rising real wages, a strong labour market, and a turnaround in the global manufacturing cycle.
Cautious ECB meeting expected
Central bankers are determined to avoid giving the market too much of an impression that rate cuts are imminent. Having seen such a huge rally in risk assets from the end of October, they will be uncomfortably aware that at least some rate cuts have essentially been priced in already.
This week’s meeting, therefore, is likely to see a cautious Christine Lagarde appear before the world’s financial markets. Inflation is coming down from its highs, but like her peers at the Federal Reserve (Fed) and elsewhere, the head of the ECB will be unwilling to move too soon on inflation lest consumer price index (CPI) begin to rise once more.
EUR/USD technical analysis
EUR/USD continues to oscillate around the 55-day simple moving average at $1.0900 but remains below its December-to-January downtrend line at $1.0909.
While it caps, further sideways trading between Monday’s $1.0909 intraday high and the 200-day simple moving average (SMA) and last week’s low at $1.0845 remains at hand. Failure there may kick off a more significant decline towards the late-August low and mid-September high at $1.04769 to $1.0766.
A rise and daily chart close above $1.0909 would eye the 12 and 15 January lows at $1.0933 to $1.0936.
EUR/USD chart
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