ECB Expected to Hold the Line; Focus Shifts to Rate Cut Timing
The European Central Bank (ECB) is expected to announce its latest policy settings today at 1:15 pm GMT and, together with the Advance estimate for Q4 GDP out of the US at 1:30 pm GMT, will be the dominant macro drivers. It is widely anticipated the central bank will hold the line and keep all three key benchmark interest rates unchanged for a third successive meeting (Main Refinance Rate at 4.5%; Marginal Lending Facility Rate at 4.75%; Deposit Facility Rate at 4.0%). As a result, attention will largely be focussed on the accompanying monetary policy statement and the presser held by ECB President Christine Lagarde at 1:45 pm GMT.
It is expected that ECB’s Lagarde will rebel against market forecasts; as of writing, markets are pricing around a 60% probability that we’ll see the first 25bp rate cut as early as April, with approximately 130bps of cuts for the year priced in. Minutes from the December meeting were released last week, revealing the ECB is unlikely to increase rates again in this cycle, though there was little mentioned regarding a timeline for policy cuts. In an interview with Bloomberg, however, ECB’s Lagarde noted that ‘short of another major shock’ the ECB has reached a peak in rates, but has pushed back against market consensus and suggested a rate cut is more likely in the summer.
Despite inflationary pressures easing in comparison to ECB projections (YoY Flash headline CPI increased to 2.9% in December 2023 from 2.4% in November, with underlying inflation cooling to 3.4% down from 3.6% over the same period) and paltry growth in 2023, should Lagarde’s recent message be stressed, the EUR could welcome bids as rate-cut forecasts are pared back. As a reminder, there will be no central bank projections at this meeting.
Latest Macroeconomic Projections from the ECB:
Headline inflation to average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026. Compared with the September staff projections, this amounts to a downward revision for 2023 and especially for 2024.
Euro system staff see growth picking up from an average of 0.6% for 2023 to 0.8% for 2024 and to 1.5% for both 2025 and 2026.
EUR/USD Sandwiched Between Key Moving Averages
As illustrated from the daily timeframe of the EUR/USD, buyers and sellers are squaring off between the 50-day Simple Moving Average (SMA) at $1.0911 and the 200-day SMA at $1.0842.
You will note that the 200-day SMA has delivered a dynamic floor of support since 17 January, withstanding multiple downside attempts. You may also acknowledge that the 50-day SMA crossed above the 200-day SMA in early January and pencilled in what many will recognise as a Golden Cross (signalling a long-term bullish trend reversal), similar to the one seen in January of 2023.
While price action recently formed a lower low (indicating an early downtrend), a breakout to the upside could be on the table, particularly if ECB’s Lagarde does indeed push back against market pricing. Technically speaking, rupturing the 50-day SMA will give breakout buyers the green light to aim for daily resistance from $1.1011.
It is expected that ECB’s Lagarde will rebel against market forecasts; as of writing, markets are pricing around a 60% probability that we’ll see the first 25bp rate cut as early as April, with approximately 130bps of cuts for the year priced in. Minutes from the December meeting were released last week, revealing the ECB is unlikely to increase rates again in this cycle, though there was little mentioned regarding a timeline for policy cuts. In an interview with Bloomberg, however, ECB’s Lagarde noted that ‘short of another major shock’ the ECB has reached a peak in rates, but has pushed back against market consensus and suggested a rate cut is more likely in the summer.
Despite inflationary pressures easing in comparison to ECB projections (YoY Flash headline CPI increased to 2.9% in December 2023 from 2.4% in November, with underlying inflation cooling to 3.4% down from 3.6% over the same period) and paltry growth in 2023, should Lagarde’s recent message be stressed, the EUR could welcome bids as rate-cut forecasts are pared back. As a reminder, there will be no central bank projections at this meeting.
Latest Macroeconomic Projections from the ECB:
Headline inflation to average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026. Compared with the September staff projections, this amounts to a downward revision for 2023 and especially for 2024.
Euro system staff see growth picking up from an average of 0.6% for 2023 to 0.8% for 2024 and to 1.5% for both 2025 and 2026.
EUR/USD Sandwiched Between Key Moving Averages
As illustrated from the daily timeframe of the EUR/USD, buyers and sellers are squaring off between the 50-day Simple Moving Average (SMA) at $1.0911 and the 200-day SMA at $1.0842.
You will note that the 200-day SMA has delivered a dynamic floor of support since 17 January, withstanding multiple downside attempts. You may also acknowledge that the 50-day SMA crossed above the 200-day SMA in early January and pencilled in what many will recognise as a Golden Cross (signalling a long-term bullish trend reversal), similar to the one seen in January of 2023.
While price action recently formed a lower low (indicating an early downtrend), a breakout to the upside could be on the table, particularly if ECB’s Lagarde does indeed push back against market pricing. Technically speaking, rupturing the 50-day SMA will give breakout buyers the green light to aim for daily resistance from $1.1011.
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