Live Coverage: ECB faces dramatic decision after German bond sell-off, geopolitical changes

Yohay Elam FXStreet

The only certainty is a rate cut – but future moves depend on an interpretation of massive German stimulus for inflation, growth and borrowing costs. EUR/USD and German bunds are set to rock.

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Reference to "restrictive" is critical for initial moves

Once again, the European Central Bank (ECB) has been set to cut rates by 25bps. Has it reached the end of the cycle? How many more cuts are on the cards? Does the Frankfurt-based institution still see its policy as restrictive? The latter question may be the key to initial movements.

If ECB President Christine Lagarde and her colleagues see policy as restrictive, it means interest rates still have a way to fall and EUR/USD would come under pressure.

Conversely, if the ECB now declares that its policy is no longer restrictive –by way of omission – its cycle is over, and therefore, EUR/USD could rise.

The bigger question is: how does the ECB see the recent announcement of massive German stimulus? An investment splurge of 500 billion euros has boosted the Euro, sent German bond yields surging and may force the ECB to buy debt to support lending.

I expect Lagarde to refrain from any commentary, as this is an early stage. On the other hand, she was stung in the past by saying spreads do not matter. They do, and eventually, the ECB might intervene.

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(This story was corrected on June 6 at 07:45 GMT to say that the European Central Bank is set to cut interest rates for the first time since 2019, not 2020.)

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Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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