The European Central Bank (EBC) did as it suggested. The interest rate cut of 25 basis points was in line with market consensus. All signs indicate that this process will continue in the near future. This is supported by weaker leading economic indicators, the ongoing process of disinflation, and the fact that the “dove” camp dominates the majority within the EBC Board of Directors. The Euro reacted by weakening. The decrease in the main currency pair was also influenced by better macro data from the US, which strengthened the dollar.
During the last conference in September, one could get the impression that the EBC would only lower interest rates in December. The data published in the meantime on PMI and inflation rate forced the Board to change intentions, which was suggested by Christine Lagarde during her speech in the European Parliament. As announced, the current refinancing rate in the euro zone is 3.4 percent and the deposit rate is 3.25 percent. This is the third reduction in the cost of money this year. The market expects further, stronger reductions.
At the press conference, journalists wanted to know whether future decisions on cuts would only be made at meetings where the latest macro projections are available, or whether the institution would act at each planned meeting. Lagarde answered somewhat evasively, not wanting to commit to a predefined path of the cycle. Thus, we heard the now clichéd sentence about decisions being made from meeting to meeting, based on macro data. However, the market would not be itself if it did not start stronger speculation. After the conference, the likelihood of a rate cut in December by 50 bp increased to almost 60 percent, which is a big change, as just two days earlier such a scenario was generally not considered.
EBC will continue to “ease”, and an increasingly strong dependence on data will cause the Euro to fluctuate more during the publication of key “figures”. In order for there not to be a reduction at every meeting, leading indicators would have to liven up, and the phase of low rises in consumer prices associated with energy would have to end. The “core” indicators are supported by wages, which continue to grow much faster than is in line with the EBC’s inflation target. This strong cost pressure should increase base inflation in the medium term.
The EUR/USD rate reached a level close to 1.08. On the main currency pair, since the end of September, we have seen a fairly dynamic downward impulse. The double top formation, visible on the daily interval chart, had previously effectively suggested possible declines. Key was the breaking of the potential “neckline”, which runs within the 1.10 level. The nearest horizontal support appears to be the 1.0780 – 1.08 level and a little lower runs the uptrend line, connecting lows from October 2023 and April and June of this year.
Lukasz Zembik Oanda TMS Brokers
Source: https://ceo.com.pl/ebc-obniza-stopy-procentowe-o-25-pb-rynek-oczekuje-dalszych-ciec-euro-slabnie-wobec-dolara-15229
