ECB Preview: end to rate cuts expected as economy settles
The European Central Bank is expected to keep rates unchanged on Thursday as the latest data shows the economy has stabilised
Markets expect the ECB to hold rates at this week’s meeting on Thursday, keeping the deposit rate at 2.00%, with attention on whether officials effectively signal the easing cycle is done while maintaining a data-dependent tone.
The decision will be accompanied by the September staff macroeconomic projections, so the focus is less on rates and more on whether the statement and Q&A lean toward “easing cycle done” versus a still-open, data-dependent stance anchored on the ECB’s three assessment pillars (inflation outlook, underlying inflation dynamics, and transmission strength).
Recent data support a hold: flash CPI edged up to 2.1% y/y in August with core at 2.3%, essentially around target. At this point it seems that policymakers are comfortable sitting tight while acknowledging residual risks, leaving markets to price in only a modest chance of another cut by next summer.
The ECB’s proactive stance and ability to front-run the cutting cycle has been supportive of European assets in recent months, even for the euro despite lower rates weighing on the currency’s rate differential against some of its major peers. Effectively, the central bank has been able to lower its base rate by 200bps in the past year, with inflation returning to target and the unemployment rate remaining historically low.
The stock market is likely to remain mildly bullish on the back of the ECB meeting if the central bank confirms it is done cutting rates for now. A commitment to continue monitoring the economy with the potential for further rate cuts in the near future, if necessary, could strengthen the bullish appetite, but the base case is already priced in. The momentum is likely to remain linked to the broader appetite for risk, mostly on the back of the expectations that the Federal Reserve will resume its cutting cycle this month after another round of softer US jobs data on Friday.
For the euro, confirmation of the end of the current cutting cycle could strengthen its appeal as other central banks are now expected to start cutting again. EUR/USD has been struggling to break past 1.1750 for the past few months as the dollar started to recover from some of the heavy losses seen earlier this year. The most immediate target for buyers will be the 1.18 mark although there is likely to be some further resistance as it heads higher. On the flipside, the ascending trendline that connects the lows from February continues to offer support, currently around 1.1660.
EUR/USD daily chart
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