The European Central Bank (ECB) is poised to announce its first interest rate cut since 2019 on Thursday at 12:15 GMT, alongside the release of updated staff economic projections. ECB President Christine Lagarde will hold a press conference at 12:45 GMT following the interest rate announcement.
Market expectations are fully priced in for a 25 basis points (bps) reduction to the benchmark Deposit Facility Rate, lowering the borrowing cost from a historic high of 4.0% to 3.75%. The decision follows the conclusion of the Governing Council’s June monetary policy meeting, with several ECB policymakers previously indicating a rate cut in June.
The focus will shift to the central bank’s communication on the future trajectory of interest rates. Analysts will closely analyze the language in the policy statement and Lagarde’s remarks during the press conference to gauge the potential timing and scope of future rate cuts this year.
Despite the Eurozone’s inflation nearing the central bank’s 2.0% target, concerns persist regarding sticky services inflation, which climbed back above 4.0% annually in May. Additionally, Eurozone annual inflation rose from 2.4% in April to 2.6% in May, surpassing the forecast for a 2.5% increase.
However, a robust economic recovery and tight labor market conditions in the Eurozone may prompt the ECB to exercise caution in committing to further rate cuts beyond June. Lagarde could adhere to the Bank’s data-dependent stance and refrain from providing explicit guidance on the policy outlook.
Market expectations indicate less than 60 bps of cuts this year, implying two moves and less than a 50% chance of a third one, a decrease from projections made during previous meetings.
The impact of the ECB meeting on EUR/USD is uncertain. The Euro remains below a three-month high of 1.0916 against the US Dollar, with the USD struggling amid speculation of a Federal Reserve interest rate cut in September following weak US ISM Manufacturing PMI data for May.
Lagarde’s non-committal stance on the timing of the next rate cut could bolster the EUR/USD recovery, suggesting the possibility of maintaining higher rates for a longer duration due to persistent inflation. However, any dismissal of concerns about sticky inflation by Lagarde could be interpreted as dovish by market participants, potentially exerting downward pressure on the EUR/USD pair.
In terms of technical analysis, EUR/USD faces resistance near 1.0890, with potential upside momentum upon acceptance above the 1.0950 level. Conversely, initial support is seen around the 21-day Simple Moving Average (SMA) at 1.0833, with further support at the 1.0800 level.
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