European Central Bank set to cut interest rates again amid weak economic growth

• The European Central Bank is on track to deliver another 25 bps interest rate cut on Thursday.
• The focus remains on the ECB's updated economic forecasts and President Christine Lagarde’s words.
• The EUR/USD pair braces for intense volatility on the ECB policy announcements.

The European Central Bank (ECB) will announce its March interest rate decision on Thursday at 13:15 GMT. The central bank is set for its sixth-rate reduction since June 2024. Updated staff economic projections will be published at this meeting. 

ECB President Christine Lagarde will hold a press confe    rence at 13:45 GMT. At this conference, she will deliver the prepared statement on monetary policy and take questions from the media.

The Euro (EUR) remains poised for a big reaction to the ECB announcements against the US Dollar (USD).

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

The ECB is on track to deliver another 25 basis points (bps) cut following its March policy meeting, reducing the benchmark rate on deposit facility from 2.75% to 2.5%.

The decision to cut the rate is undebatable, as the Euro area’s weak economic prospects remain a leading cause for concern for ECB policymakers. The old continent’s disinflation path remains intact, allowing the ECB some room to continue its easing trajectory.  

Data released by Eurostat on Monday showed that the Eurozone Harmonized Index of Consumer Prices (HICP) rose 2.4% year-over-year (YoY) in February after recording a 2.5% growth in January. The market forecast was for a 2.3% acceleration in the reported period. Meanwhile, the core HICP advanced 2.6% YoY in February, compared with a 2.7% increase in January, meeting the 2.6% expectations.

However, the Bank’s hints on its next move on interest rates will grab the eyeballs amid looming United States (US) President Donald Trump’s reciprocal tariffs on the European Union (EU), which could significantly impact the bloc’s inflation and economic outlooks. Trump threatened to impose 25% tariffs on imports from the EU last week, claiming that the economic and political bloc was formed “to screw” the US.

Therefore, the language in the policy statement and the updated economic forecasts will be closely scrutinized to gauge the timing and the scope of the ECB’s future rate cuts. According to the latest Reuters poll, “the ECB will take another 50 bps off the deposit rate next quarter and then hold steady through at least 2026.” “Markets have fully priced in an end-December rate of 2.00%,” the survey showed.

The markets continue pricing further rate cuts even as top policymakers shared conflicting messages. ECB board member and a vocal policy hawk Isabel Schnabel said in a Financial Times (FT) interview last month: “We are getting closer to the point where we may have to pause or halt our rate cuts.”

“I’m not saying that we’re there yet. But we have to start the discussion,” she added.

On the other hand, her colleague and the head of the Italian central bank, Fabio Panetta, noted: "The available indicators seem to suggest that the predominant risk remains inflation falling below 2% over the medium term.”

Meanwhile, the accounts of the January ECB meeting published on February 27 showed: “Members concurred that the disinflationary process was well on track. But there was some evidence suggesting a shift in the balance of risks to the upside since December."

The accounts added that some policymakers argued for "greater caution" regarding the size and pace of further rate cuts as policy rates were approaching the neutral level.

Previewing the ECB meeting, TD Securities analysts said: “With just five weeks since their last meeting, there's little to move the dial, and a 25bps cut is broadly expected. Projections should see minimal changes, and while language around ‘restrictive’ policy may be changed slightly, we doubt there's a full removal of that statement.”

“April/June will be the far more interesting meetings and highly dependent on tariffs,” the analysts added.

How could the ECB meeting impact EUR/USD?

The EUR/USD pair remains unstoppable in the run-up to the ECB event risk. The pair extends the recovery from two-week lows of 1.0360 as the Euro jumps on Germany’s proposed debt break reforms. Will the major sustain the recovery momentum on the ECB rate-call?

The ECB is expected to stick to its prudence on the policy outlook, reiterating that it is not on any pre-determined path on interest rates. However, if the Bank makes any material change to its “restrictive” policy language, markets could perceive it as a hawkish shift and add to the renewed EUR/USD upside. The pair is set to extend the recovery toward 1.0700 in such a scenario.

However, the main currency pair could come under intense selling pressure if there is no change in the language or tone of the policy statement. The Euro could suffer if ECB President Lagarde explicitly endorses future rate cuts, expressing concerns over a weak economic outlook.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD:

“The EUR/USD recovery remains unabated heading into the ECB showdown. However, The Relative Strength Index (RSI) sits within the overbought region on the daily chart, warranting caution for Euro buyers. If a correction unfolds, the immediate support of the 200-day Simple Moving Average (SMA) at 1.0723 will be tested. Acceptance under that level will put the 1.0600 round level at risk. The last line of defense for EUR/USD buyers is the 100-day SMA at 1.0507.”

“Should Euro buyers defy the bearish technical indicators, the door will likely open for a test of the 1.0900 level. Further up, the November 2024 high of 1.0937 will be on their radars.”