European Central Bank set to cut interest rates again as economic outlook worsens

  • The European Central Bank is expected to cut benchmark interest rates by 25 bps at the October monetary policy meeting.
  • ECB President Christine Lagarde’s press conference will be closely scrutinized for new policy signals.
  • The ECB’s policy announcements are intended to inject volatility around the EUR/USD pair.

The European Central Bank’s (ECB) interest rate decision will be announced after the October monetary policy meeting at 12:15 GMT on Thursday.

ECB President Christine Lagarde’s press conference will begin at 12:45 GMT, where she will present her prepared statement on monetary policy and answer questions from the media. The ECB announcements are likely to increase the volatility of the Euro (EUR).

What to expect from the European Central Bank’s interest rate decision?

Following the September monetary policy meeting, the ECB decided to reduce the interest rate on the marginal lending facility to 3.9% from 4.5% and the deposit facility, also known as the reference interest rate, by 25 basis points (bps) to 3.5%. The ECB also cut the interest rate on main financing operations by 60 bps to 3.65%.

The ECB is widely expected to reduce the deposit facility rate by another 25 bps to 3.25% after the October meeting.

At the press conference after the meeting, President Lagarde refrained from offering any clues about the timing of the next rate cut, saying there was a relatively short time until the October meeting and adding that they have no commitments whatsoever.

However, after data released by Eurostat showed that the annual Consumer Price Index (CPI) softened to 1.8% in September from 2.2% in August, investors began to lean towards a further step. policy easing in October.

According to Reuters, more than 90% of economists surveyed expect a 25 bps cut after September inflation fell below the ECB’s 2% target. Furthermore, most respondents expect another 25 bps reduction in key rates in December.

In the run-up to the October ECB event, “the data has moved quickly against the ECB’s September message, and we and the market now expect a 25 bps rate cut at the October meeting,” the analysts said. from TD Securities.

“Government Council members have also thrown the door wide open to a cut. The message of a ‘meeting-by-meeting’ approach to policy is likely to hold, but Lagarde is unlikely to deviate from a cut.” in December,” they added.

How could the ECB meeting impact EUR/USD?

After losing more than 1.5% against the US Dollar (USD) in the first week of October, the Euro has largely stabilized. Looking ahead to the ECB confrontation, EUR/USD remains in a consolidation phase below 1.1000.

ECB President Christine Lagarde is likely to stick to the bank’s data-dependent stance and refrain from giving a concrete answer on the next rate cut move. Should it reiterate the ECB’s expectation that inflation will rise again in the latter part of the year, investors could see this as a sign that the ECB will keep interest rates unchanged at the last policy meeting of the year. on December 12. In this scenario, the immediate reaction could be positive for the Euro.

Conversely, the Euro could come back under selling pressure if the policy statement, or Lagarde, express growing concerns about a worsening economic outlook in the Eurozone, while acknowledging better-than-expected progress on disinflation. . In the revised projections, ECB staff saw inflation at 2.5% in 2024 and 2.2% in 2025.

Furthermore, minutes from the ECB’s September meeting showed that policymakers noted that negative surprises in the Purchasing Managers’ Index (PMI) readings for manufacturing output and weakening external demand indicated potential headwinds to short-term prospects.

Eren Sengezer, Lead Analyst for the European session at FXStreet, offers a brief technical outlook for EUR/USD:

“Short-term technical points point to a bearish bias for EUR/USD. The Relative Strength Index (RSI) indicator on the daily chart remains in bearish territory well below 50, while holding above 30 , suggesting that the pair has more room to the downside before becoming technically oversold.”

“July-September uptrend 61.8% Fib retracement level and 200-day SMA form strong support at 1.0870 ahead of 1.0800 (78.6% Fib retracement) and 1.0680 (uptrend start point), 1.1000 (38.2% Fib retracement) lines up as key resistance ahead of 1.1060-1.1080 (50-day SMA, 23.6% Fib retracement). ) and 1.1200 (end point of the uptrend).”

The Euro FAQs

The Euro is the currency of the 19 countries of the European Union that belong to the eurozone. It is the second most traded currency in the world, behind the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of more than $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2 %).

Source: Fx Street

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