Morning Brief – Feathering the brakes or cutting the lines?

Charles Porter
Thu 6 Jun 2024

Feathering the brakes or cutting the lines?

Today the ECB will deliver to markets its latest monetary policy decision. A press conference will follow the decision which will see journalists probe the President for information regarding the path of future policy adjustments. Today’s decision will take place within a market that has already fully priced in a 25 basis point cut. There would be very little incentive for the ECB’s governing council to deny the market of this expectation. If anything it could disturb market equilibrium and encourage higher volatility that could make the central bank’s task harder in the long run.

The attention will therefore almost exclusively be upon any indication of expected future policy changes. As is inevitable at this stage in a rate cutting cycle, unless the President wishes to sink ships, there shall be no loose lips. Heading into the event, communication from ECB rate setting members has focussed upon a gradual and data dependent approach to policy adjustment beyond the June meeting. As Q2 2024 has progressed, the extent of easing priced in from the ECB has moderated. Despite Euro risks remaining relatively well balanced beyond any endogenous risks to EURUSD caused by downside USD risks, there is room for further easing to be priced in.

Any such sympathies or indications from the ECB publication at 13:15 BST or the press conference that follows 30 minutes later could encourage EUR selling. Market volatility has moderated overnight whilst the Mexican Peso and SA Rand have stabilised. Significant post-electoral risks remain within both currencies. In the short run, risks are most pronounced within ZAR as opposed to MXN as the shape of any prospective coalition forms. We are familiar with these two currencies driving wider risk sentiment particularly within emerging markets. However, spillovers across developed markets have been tangible this week. Markets will also be wary therefore of further volatility creating additional noise within prices.

Discussion and Analysis by Charles Porter

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