ECB won't 'close the door' on future rate adjustments today
|Given this unusually elevated uncertainty, President Lagarde, who has a penchant for providing very little in the way of forward guidance, has even less incentive to hint at the path ahead for rates.
She is instead likely to largely repeat her message from June, when she said that policy was “in a good place”, and that the ECB was nearing the end of its cutting campaign. At the same time, she is unlikely to close the doors to further rate adjustments, particularly as tariff escalation could have disinflationary implications for the Eurozone. In the ECB’s “severe” scenario, which assumes higher tariffs and increased trade uncertainty, the bank expects weaker price pressures, particularly in the longer term.
Even when discounting the lingering trade uncertainty, we think that there are no real compelling arguments in the data for the ECB to lower rates again at this juncture, particularly as policymakers set the bar for cuts extremely high at the June meeting.
One could argue that the recent appreciation in the common currency, and the uptick in global oil prices, could increase pressure on the Governing Council to lower rates again. That said, we think that the impact on the medium-term inflation outlook from these factors is rather minimal, and insufficient in order to force the bank’s hand this week.
We do not expect the ECB’s communications to have an outsized impact on the euro this week, with Lagarde likely to stay as non-committal as possible, and remain tight-lipped about the outlook for Euro Area rates. Yet, with markets currently on the fence as to the timing of the next cut (a September cut is roughly 45% priced-in), we could see some volatility if Lagarde’s comments tip the balance one way or the other.
We believe that another cut from the ECB is likely, although it may be delayed until later in the year, barring a significant deterioration in trade relations between the EU and the US. In any case, signals related to trade negotiations will remain in focus in the coming weeks, partly due to their potential significant impact on ECB decisions.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.