ECB On Hold, But For How Long?

The ECB is widely expected to hold rates unchanged at Thursday's policy meeting, but troubles in the economic outlook could leave markets questioning when the next rate cut will come.

Key Anticipated Points

• The ECB is expected to hold rates unchanged, with a majority of economists predicting no more rate cuts for the rest of the year.
• Euroarea inflation is near target, and the economy is projected to grow steadily, with markets looking at updates to the ECB's growth and inflation forecasts for guidance about when or if there will be another rate cut.
• Market reaction could centre on stability concerns, as the Fed cuts rates and the French political turmoil.

The End of Rate Cuts?

Over 95% of economists predict that for the third time in a row at the end of its meeting on Thursday, 11 September. Inflation in the shared economy is practically at the target rate, and the economy is projected to remain steady, growing at around 1.2% this year. As a result, there is a growing consensus that Europe's central bank has reached the end of its easing cycle. 60% of economists say that there will be no change to the reference rate for the rest of the year. Futures markets are pricing in a similar trajectory.

According to the ECB's survey of professional forecasters, and decline to 1.8% the year after, implying that the ECB will have little reason to change policy. However, the forecast assumes that the current situation will be unchanged over that horizon. The difficult-to-predict US tariff regime and the political turmoil in France add risks to the outlook. The ECB staff will update their quarterly projections concurrently with the September 11 meeting, with the consensus among economists that the outlook will be largely unchanged. This introduces one of the situations where the market could be surprised. If the projections cut economic growth forecasts, it could be a sign that the ECB will be more inclined to cut rates later in the year instead of waiting until 2026.

Potential Market Reactions

In her press conference after the last meeting, ECB President Christine Lagarde said that but also provided caution about uncertainties in the supply chain and trade policy. Markets are expecting the ECB and its officials to stick to this wait-and-see narrative, so a change could cause the EURUSD to react. Unlike the ECB, the Fed is widely expected to cut rates next week, which would start to narrow the interest rate gap between the two currencies. However, political jitters could stand in the way of the euro gaining substantially on the dollar. The EURUSD has been supported by investors looking towards the relative stability of Europe amid high valuations of US stocks. France's struggles to secure a government could weigh on investor appetite for euro-denominated assets.

Can EURUSD See Further Upward Momentum?

Geopolitical concerns have left the dollar a little stronger over the last couple of days, pulling the EURUSD off recent highs. But this has left the pair near the middle Bollinger Band at 1.1700. A break below would find support at the 1.1640 level, the BB low, followed by 1.1600 and the August month low of 1.1575. A turn upwards would encounter the 1.1750 round resistance, with the nearest swing high at 1.1790 coinciding with the upper BB.

Source: SpreadEx | EURUSD