Could the ECB adopt its June 2022 playbook and preannounce a rate cut? – Preview
April 8, 2024 3:27 pm
The ECB meets on Thursday with strong indications for a dovish tilt
Low chances of a rate cut being announced this week
The euro could enjoy a short-term rally against the US dollar if ECB proves hawkish
Decision will be announced on Thursday 12.15 GMT, press conference at 12:45 GMT
The ECB meets this week
The European Central Bank is hosting its third rate-setting gathering for 2024 on Thursday, April 11. The chances of significant announcements are quite low, but the market appears ready to start the countdown for the first rate cut since 2016.
Since the March ECB meeting when the ECB staff projections pointed to a 2% headline inflation rate at the end of 2025, the ECB doves have come out in force guiding the market to a June rate cut.
Interestingly, the ECB hawks have recognized that the tide has turned in favour of easier monetary policy. They have probably decided to keep their powder dry for the next key decisions, for example an increase in the Minimum Reserve Requirement being discussed behind closed doors.
Could the ECB surprise with an April rate cut?
Economic data releases since the early March meeting have been mixed. Inflation continues to surprise on the downside with the core indicator excluding energy, foods, alcohol and tobacco falling below 3% for the first time since March 2022. In addition, producer prices prints point to weaker inflationary pressures down the line.
However, there appears to be some faint light at the end of the tunnel as the main business surveys including the various PMIs and the German IFO survey have managed to show some improvement. Most of these surveys remain subdued but the outlook might be a bit less murky than currently perceived.
Therefore, despite the plethora of dovish commentary, an April rate cut looks unlikely for Thursday’s meeting.
Could the ECB preannounce a June rate cut?
President Lagarde, at both the March ECB meeting and a key speech in late March, focused on wages and two key pieces of data to be made available by the June meeting. While the ECB wants to avoid making reckless monetary policy decisions, Lagarde could be just trying to gain time in order to achieve unanimity in the ECB council before pre-committing to a rate move.
Having said that, Lagarde’s stance could also reveal some hesitation about preannoucing a rate cut in such a fluid economic environment, especially following the new 5-month high recorded in WTI oil futures. A rally towards the $100 mark would open the door to a new bout of inflation. Moreover, the next Fed meeting is being held in three weeks and the recent strong run of US data prints has almost pushed the first Fed rate cut to September.
However, if there is an overwhelming consensus for such a communication move at Thursday’s meeting, we could have a repeat of the June 9, 2022 gathering when “the Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting”.
Euro/dollar could see increased volatility on Thursday
It has been a weak first quarter of 2024 for the euro, but its performance could have been much worse considering that the euro area remains the weakest growth link. Market participants are trying to take advantage of this resilience, but this week’s performance against the US dollar clearly depends on the ECB meeting’s outcome.
Focusing on Thursday and the market has already priced in a slightly dovish meeting. However, an aggressively dovish gathering with President Lagarde preannouncing a June rate cut, could prove the catalyst for a strong move towards the key 1.0727-1.0735 area.
On the flip side, a hawkish meeting could shock the market and lead euro/dollar higher towards to the September 28, 2022 trendline at around 1.0910. However, the euro’s short-term outlook is unlikely to change dramatically as the market would quickly return to its current mindset for a June rate cut.
The ECB meets on Thursday with strong indications for a dovish tilt
Low chances of a rate cut being announced this week
The euro could enjoy a short-term rally against the US dollar if ECB proves hawkish
Decision will be announced on Thursday 12.15 GMT, press conference at 12:45 GMT
The ECB meets this week
The European Central Bank is hosting its third rate-setting gathering for 2024 on Thursday, April 11. The chances of significant announcements are quite low, but the market appears ready to start the countdown for the first rate cut since 2016.
Since the March ECB meeting when the ECB staff projections pointed to a 2% headline inflation rate at the end of 2025, the ECB doves have come out in force guiding the market to a June rate cut.
Interestingly, the ECB hawks have recognized that the tide has turned in favour of easier monetary policy. They have probably decided to keep their powder dry for the next key decisions, for example an increase in the Minimum Reserve Requirement being discussed behind closed doors.
Could the ECB surprise with an April rate cut?
Economic data releases since the early March meeting have been mixed. Inflation continues to surprise on the downside with the core indicator excluding energy, foods, alcohol and tobacco falling below 3% for the first time since March 2022. In addition, producer prices prints point to weaker inflationary pressures down the line.
However, there appears to be some faint light at the end of the tunnel as the main business surveys including the various PMIs and the German IFO survey have managed to show some improvement. Most of these surveys remain subdued but the outlook might be a bit less murky than currently perceived.
Therefore, despite the plethora of dovish commentary, an April rate cut looks unlikely for Thursday’s meeting.
Could the ECB preannounce a June rate cut?
President Lagarde, at both the March ECB meeting and a key speech in late March, focused on wages and two key pieces of data to be made available by the June meeting. While the ECB wants to avoid making reckless monetary policy decisions, Lagarde could be just trying to gain time in order to achieve unanimity in the ECB council before pre-committing to a rate move.
Having said that, Lagarde’s stance could also reveal some hesitation about preannoucing a rate cut in such a fluid economic environment, especially following the new 5-month high recorded in WTI oil futures. A rally towards the $100 mark would open the door to a new bout of inflation. Moreover, the next Fed meeting is being held in three weeks and the recent strong run of US data prints has almost pushed the first Fed rate cut to September.
However, if there is an overwhelming consensus for such a communication move at Thursday’s meeting, we could have a repeat of the June 9, 2022 gathering when “the Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting”.
Euro/dollar could see increased volatility on Thursday
It has been a weak first quarter of 2024 for the euro, but its performance could have been much worse considering that the euro area remains the weakest growth link. Market participants are trying to take advantage of this resilience, but this week’s performance against the US dollar clearly depends on the ECB meeting’s outcome.
Focusing on Thursday and the market has already priced in a slightly dovish meeting. However, an aggressively dovish gathering with President Lagarde preannouncing a June rate cut, could prove the catalyst for a strong move towards the key 1.0727-1.0735 area.
On the flip side, a hawkish meeting could shock the market and lead euro/dollar higher towards to the September 28, 2022 trendline at around 1.0910. However, the euro’s short-term outlook is unlikely to change dramatically as the market would quickly return to its current mindset for a June rate cut.
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