The European Central Bank is set to cut deposit rates for the first time since 2019

• The European Central Bank is set to cut interest rates by 25 basis points on Thursday.
• ECB President Christine Lagarde could maintain a data-dependent stance on the outlook for future rates.
• The fate of the Euro depends on the ECB’s updated forecasts and Lagarde’s speech.

The European Central Bank (ECB) will announce its first deposit interest rate cut since 2019 on Thursday at 12:15 GMT.

Updated staff economic projections will be released along with the interest rate announcement. ECB President Christine Lagarde’s press conference will take place at 12:45 GMT.

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

A 25 basis point (bps) reduction in the benchmark deposit facility rate is fully priced in, following the conclusion of the Governing Council’s June monetary policy meeting, which will reduce the cost of borrowing from a record high from 4.0% to 3.75%.

Several ECB policymakers have long promised a rate cut in June. Therefore, the main focus will be on the central bank’s communication on the way forward regarding interest rates. Market participants will closely examine the language in the policy statement as well as ECB President Christine Lagarde’s words during the press conference to assess the scope and timing of any upcoming rate cuts this year.

Although euro zone inflation has moved closer to the central bank’s 2.0% target, persistent services inflation (back above 4.0% annually in May) has raised expectations that the ECB will not embark on an easing cycle. aggressive. Meanwhile, annual euro zone inflation rose from 2.4% in April to 2.6% in May, beating the forecast for a 2.5% increase.

Furthermore, a strong economic recovery and a tight labor market in the old continent will likely force the ECB to refrain from committing to additional rate cuts at meetings beyond June.

Lagarde could therefore maintain the bank’s data-dependent stance and avoid providing any guidance on the policy outlook.

“I think they will be much less prescriptive about what comes next than they have been around the June meeting,” said Paul Hollingsworth, chief European economist at BNP Paribas.

Markets expect less than 60 bps of cuts this year, which implies two moves and less than a 50% chance of a third. This is less than the three rate cuts projected when the ECB last met in April and at least five rate cuts expected in 2024 in January, according to Reuters.

How could the ECB meeting impact EUR/USD?

Looking ahead to the ECB statement, the Euro is consolidating below a three-month high of 1.0916. The US Dollar (USD) struggles to maintain bullish momentum amid resurgent bets on a Federal Reserve (Fed) interest rate cut in September following weak US ISM Manufacturing PMI data for May.

ECB President Christine Lagarde’s non-committal stance on the timing of the next rate cut could add momentum to the EUR/USD recovery as it would imply the bank could keep rates higher for longer amid the persistence of inflation.

On the other hand, if Lagarde dismisses concerns about persistent inflation, it could be interpreted as a bit dovish by market participants, which would eventually prove negative for the EUR/USD pair.

Dhwani Mehta, Senior Analyst at FXStreet, offers a brief technical outlook for trading the Euro on ECB policy announcements: “EUR/USD extends its battle around the strong resistance near 1.0890, suggesting that buyers are gaining strength. The 14-day Relative Strength Index (RSI) remains firmly above the midline, near 60, adding credibility to the pair’s bullish potential.”

“Acceptance above the 1.0950 level is critical to unleash further upside towards the psychological level of 1.1000. EUR buyers will then target the static resistance at 1.1050. On the contrary, the initial demand area is seen around the Median 21-day SMA at 1.0833, below which support at 1.0800 could be tested. The 100-day SMA aligns at that level. Further south, the 50-day SMA confluence zone. The 200-day SMA near 1.0775 could act as a tough nut for Euro sellers,” adds Dhwani.