European Central Bank set to cut interest rates again amid easing inflation and tariff uncertainty
- The European Central Bank is expected to lower key rates by 25 bps on Thursday.
- The focus will be on the ECB's statement language and President Christine Lagarde’s comments.
- The EUR/USD pair braces for intense volatility on the ECB policy announcements.
The European Central Bank (ECB) will announce its April interest rate decision on Thursday at 12:15 GMT. Markets widely expect the central bank to lower key rates for the sixth consecutive time.
ECB President Christine Lagarde will hold a press conference at 12:45 GMT. At this conference, she will deliver the prepared statement on monetary policy and respond to 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 set to deliver another 25 basis points (bps) cut after the April policy meeting, reducing the benchmark rate on the deposit facility to 2.25% from 2.5%, with the disinflation process remaining on track.
Data released by Eurostat showed that the Harmonized Index of Consumer Prices (HICP) in the Eurozone rose 2.2% year-over-year (YoY) in March, after recording a 2.3% increase in February. Additionally, the annual core HICP inflation softened to 2.4% from 2.6% in the same period.
Investors will scrutinize the policy statement to see how the ECB expects the United States’ new trade regime to impact the inflation outlook and growth prospects in the European Union (EU).
Previewing the ECB’s April meeting, TD Securities analysts said they forecast a 25 bps reduction in rates. “Key focus in the press conference should be on economic uncertainty pertaining to trade policies and global demand going forward. As such, wording on future rate path is likely to be vague and stress data dependency,” analysts noted.
Earlier in the month, ECB Governing Council member Gediminas Šimkus argued that the US tariff decisions warrant a more accommodative monetary policy and added that a 25 bps cut will be needed in April. Although the US and the EU agreed to a 90-day pause in reciprocal tariffs since then, there are still a lot of uncertainties regarding what the EU-US trade relations will look like after the grace period. Citing people familiar with discussions, Bloomberg reported earlier this week that the EU was expecting a bulk of the US import tariffs to remain in place after little progress was made in negotiations that took place on Monday.
How could the ECB meeting impact EUR/USD?
EUR/USD gained more than 4% in March and is already up about 5% since the beginning of April. During this period, the intense selling pressure surrounding the US Dollar (USD) on growing fears over an economic downturn as a result of deepening trade conflicts fuelled the pair’s rally.
In case the ECB policy statement, or President Lagarde, suggests that they remain confident about the disinflation process resuming, despite the tariff uncertainty, investors could see this as a sign of further policy-easing in the near future. A pessimistic tone about the economic outlook could reaffirm this view. In this scenario, the Euro could come under selling pressure with the immediate reaction, opening the door to a downward correction in EUR/USD.
On the other hand, the Euro could continue to outperform the USD if the ECB puts more emphasis on upside inflation risks and signals a possible pause in rate cuts, citing the need for more time to assess the impact of tariffs.
Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD:
“EUR/USD trades near the upper limit of a two-month-old ascending regression channel and the Relative Strength Index (RSI) indicator on the daily chart holds above 70, suggesting that the pair could stage a technical correction before the next leg higher.”
“On the downside, the mid-point of the ascending channel aligns as a key support level at 1.1200. If EUR/USD makes a daily close below this level, 1.1100 (static level) could be seen as interim support ahead of 1.1000 (psychological level, 20-day Simple Moving Average). Looking north, resistances could be spotted at 1.1435 (upper limit of the ascending channel), 1.1500 (round level, static level) and 1.1580 (static level),” Sengezer added.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
Artigos Recomendados
