ECB Preview: Three scenarios and their implications for EUR/USD – TDS

Economists at TD Securities discuss the European Central Bank (ECB) Interest Rate Decision and their implications for the EUR/USD pair.

Base Case (65%)

The ECB delivers another hold with no major changes to the press statement. Forecasts are roughly unchanged, though with small downside revisions to inflation in 2024. Lagarde notes that inflation developments are promising, and while wage growth is sticky, there are early signs that it is coming down. She remains vague on the timing of the first cut – consistent with Q2 cuts. EUR/USD +0.15%.

Hawkish (20%)

President Lagarde notes that inflation is coming down, but points to the strong Feb data as a caution against being complacent. Moreover, Lagarde continues to emphasise the importance of wages and suggests that the Q1 wage data, released after the April meeting, will be key to determining when it is reasonable to start easing policy. While Lagarde does not explicitly push back against an April cut, she says that cuts are some ways off. EUR/USD +0.70%.

Dovish (15%)

The ECB delivers another hold and makes no major changes to the press statement. Forecasts are revised down, particularly for 2024 inflation, but also for inflation in 2025, with headline inflation now expected to be below target in 2025 and 2026. Lagarde says that while wage growth is a key focus, it's already showing early signs of cooling, and is a lagging indicator, and inflation remains the ECB's sole target. While Lagarde does not want to specify when the first cut is on the table, she makes clear that April is definitely a live meeting. EUR/USD -0.60%.