European Central Bank set to cut interest rates for first time since 2019

• The European Central Bank is set to cut interest rates by 25 bps on Thursday.
• ECB President Christine Lagarde could stick to a data-dependent stance on future rate outlook.
• The Euro’s fate hinges on the ECB’s updated forecasts and Lagarde’s speech. 

The European Central Bank (ECB) is set to announce its first interest rate cut since 2019 on Thursday at 12:15 GMT.

The updated staff economic projections will be published alongside the interest rate announcement. ECB President Christine Lagarde’s press conference will follow at 12:45 GMT.

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

A 25 basis points (bps) reduction to the benchmark Deposit Facility Rate is fully baked in, following the conclusion of the Governing Council’s June monetary policy meeting, which will bring down the borrowing cost from a historic high of 4.0% to 3.75%.

Several ECB policymakers have long promised a rate cut in June. Therefore, the main focus will be on the central bank’s communication on the path forward on interest rates. Market participants will closely scrutinize the language in the policy statement, as well as ECB President Christine Lagarde’s words during the press conference to gauge the scope and timing of the next rate cuts this year.

Although the Eurozone’s inflation has come close to the central bank’s 2.0% target, the sticky services inflation (back above 4.0% annually in May) raised expectations that the ECB won’t embark upon an aggressive easing cycle. Meanwhile, Eurozone annual inflation rose from 2.4% in April to 2.6% in May, beating the forecast for a 2.5% increase.

Further, a strong economic recovery and a tight labor market in the old continent will likely compel the ECB to refrain from committing to additional rate cuts in the meetings beyond June.

Lagarde could, therefore, stick to the Bank’s data-dependent stance and avoid providing any guidance on the policy outlook.

"I think they will be far less prescriptive about what comes next than they have been around the June meeting," said BNP Paribas' chief Europe economist Paul Hollingsworth in a research note.

Markets are expecting fewer than 60 bps of cuts this year, implying two moves and less than a 50% chance of a third one. This is down from three rate cuts projected when the ECB last met in April and at least five rate cuts expected in 2024 in January, according to Reuters.

How could the ECB meeting impact EUR/USD?

Heading into the ECB showdown, the Euro is consolidating below a three-month top of 1.0916. The US Dollar (USD) struggles to sustain the upside momentum amid the revival of bets for a Federal Reserve (Fed) interest rate cut in September after weak US ISM Manufacturing PMI data for May.

ECB President Christine Lagarde’s non-commital stance on the timing of the next rate cut could add extra legs to the EUR/USD recovery, as it would imply that the Bank could maintain rates higher for longer amid the persistence of inflation.

On the other hand, if Lagarde dismisses concerns about sticky inflation, it could be read as a bit dovish by market participants, eventually rendering negative for the EUR/USD pair.

Dhwani Mehta, FXStreet’s Senior Analyst, offers a brief technical outlook for trading the Euro on the ECB policy announcements: “EUR/USD extends its battle at around the stiff resistance near 1.0890, suggesting that buyers are gathering strength. The 14-day Relative Strength Index (RSI) holds strongly above the midline, near 60, adding credence to the pair’s upside potential.”

“Acceptance above the 1.0950 level is critical to unleashing further upside towards the 1.1000 psychological level. EUR buyers will then aim for the static resistance at 1.1050. Conversely, the initial demand area is seen around the 21-day Simple Moving Average (SMA) at 1.0833, below which the 1.0800 support could be tested. The 100-day SMA aligns at that level. Further south, the confluence zone of the 50-day SMA and the 200-day SMA near 1.0775 could act as a tough nut to crack for Euro sellers,” Dhwani adds.