European Central Bank set to cut interest rates again amid slow economic growth

• The European Central Bank is expected to cut benchmark interest rates by 25 bps at the December policy meeting.
• ECB President Christine Lagarde’s presser will be closely scrutinized for fresh policy cues.
• The ECB policy announcements are set to ramp up the Euro’s volatility.

The European Central Bank (ECB) interest rate decision will be announced following the December monetary policy meeting at 13:15 GMT on Thursday.

ECB President Christine Lagarde's press conference will follow, beginning at 13:45 GMT, where she will deliver the prepared statement on monetary policy and respond to media questions. The ECB announcements are likely to drive the Euro’s (EUR) valuation in the second half of the week.

What to expect from the European Central Bank interest rate decision?

Following the October policy meeting, the ECB announced that it lowered key rates by 25 basis points (bps). With this decision, the interest rate on the main refinancing operations, the interest rates on the marginal lending facility and the deposit facility, also known as the benchmark interest rate, stood at 3.4%, 3.65% and 3.25%, respectively.

The ECB is widely expected to lower key rates by another 25 bps after the December meeting. 

In the post-meeting press conference in October, President Lagarde said that the ECB policy was still restrictive and noted that they are concerned about the growth outlook. Although she refrained from clearly stating whether they would opt for another policy-easing step at the last meeting of the year, markets widely expect the ECB to lower key rates by 25 bps.

Commenting on the policy outlook, ECB policymaker Joachim Nagel noted that he would have no objections to reducing the policy rate, given that the disinflation process is proceeding largely as currently projected. On a similar note, Governing Council member Francois Villeroy de Galhau said: “There is every reason to cut on December 12th.” “Optionality should remain open on the size of the cut, depending on incoming data, economic projections and our risk assessment,” he added.

Assessing the EUR’s positioning in the Commitment of Traders report (COT), “EUR net short positions have increased for the third consecutive week, driven by an increase in short positions,” Rabobank analysts said. They added: “EUR was the worst performing G10 currency in the month of November, depreciating 2.37% against USD. EUR has suffered from deteriorating economic fundamentals and impending cuts from the ECB. We expect the ECB to cut the policy rate 25bp at the December 12th.”

How could the ECB meeting impact EUR/USD?

In November, EUR/USD lost nearly 3%. In addition to the negative impact of the ECB’s dovish policy outlook on the EUR, the broad-based US Dollar (USD) strength following Donald Trump’s victory in the US presidential election weighed heavily on EUR/USD. Since the beginning of December, EUR/USD has been fluctuating in a relatively tight range, reflecting investors’ hesitancy to take large positions ahead of the ECB and the Federal Reserve’s (Fed) final meetings of 2024.

In case the ECB unexpectedly lowers key rates by 50 bps, the immediate reaction could trigger a Euro selloff and open the door for another leg lower in EUR/USD. If the ECB opts for a 25 bps cut but Lagarde voices concerns over the economic situation in the Eurozone and mentions growing downside risks to inflation, EUR/USD is likely to extend its downtrend, even if the immediate market reaction is mixed.

In this current market environment, the Euro would need a significant hawkish surprise to stage a steady recovery against the USD. If Lagarde adopts a more optimistic tone about the economic outlook and highlights the need for patience in further policy easing, EUR/USD could gain traction in the near term. 

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD:

“Following the modest rebound seen in December, EUR/USD’s near-term technical outlook points to a loss of bullish momentum. On the daily chart, the Relative Strength Index edges higher toward 50 and the pair manages to hold above the 20-day Simple Moving Average (SMA).”

“On the upside, the Fibonacci 38.2% retracement of the October–December downtrend aligns as the next resistance at 1.0700 before 1.0800 (Fibonacci 50% retracement) and 1.0840 (200-day SMA). In case EUR/USD flips 1.0530 (20-day SMA) into resistance, technical sellers could continue to dominate the pair’s action. In this scenario, 1.0400 (end-point of the downtrend) could be seen as the next support before 1.0260 (static level).”