Morning Brief – ECB

Charles Porter
Tue 9 Apr 2024

A long shot: ECB

The ECB will deliver its latest monetary policy decision on Thursday followed by a press conference. For the first time in a long time, there is a faint prospect of an interest rate cut. At the very least, meaningful non-interest rate monetary tools, including the plethora of programs sustaining the ECB’s swollen balance sheet, could be up for significant change. However, over the past year we have seen the EUR and EURUSD in particular become significantly less dependent upon changes in relative rates of return. So, will the ECB cut and, if it did, would it get away with it?

Should the ECB cut its benchmark interest rates by any margin on Thursday it would be marked as a highly dovish move. There is a non-zero probability of it happening but even based on recent data and a resurgence in rate cut expectations within the market for 2024, it still seems premature for this Bank. Instead, the focus will be on how the ECB frames its June decision where current market pricing currently shows a 25 basis point cut all but done. So too the bank’s view for the economy past the June meeting will be critical for the Euro.

As a result of the outperformance of the equity market and the low volatility environment that has ensued, EURUSD has decoupled from short term swap rates. It could therefore be argued that Thursday’s decision is less of a threat to the Euro than normal. That is true if the ECB keeps its cards close to its chest, doesn’t hike and maintains ambivalent language in its statement and press conference. However, an unlikely cut or shake up of rate expectations could well deliver the sort of jump start and therefore volatility which would in turn raise the important of short term rate differentials. There are therefore two very different images both perfectly plausible on Thursday based on how Lagarde’s ECB navigates this April decision.

Discussion and Analysis by Charles Porter

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