It’s all about Europe today. The ECB is set to cut interest rates by 25bps later today, there is approx 35bps of cuts currently priced in by financial markets, however, expectations of a 50bp rate cut have been scaled back during December.
It’s all about Europe today. The ECB is set to cut interest rates by 25bps later today, there is approx 35bps of cuts currently priced in by financial markets, however, expectations of a 50bp rate cut have been scaled back during December.The ECB rate cut will be accompanied by the updated ECB staff economic forecasts and a press conference from Christine Lagarde. The market is expecting a dovish tilt to both the forecasts and to Lagarde’s comments, which is why EUR/USD has come under so much pressure in recent weeks.
EUR/USD has also come under pressure in the lead up to this meeting and is down more than 0.8% in the last five days. It also fell below the bottom of its recent range and slipped below $1.05 on Wednesday. EUR/GBP also fell to a 2-year low this week.
It is hard to see how the ECB can do anything to boost the outlook for the euro, since political and economic risks remain rife in the currency bloc. Both France and Germany are essentially politically rudderless, German economic growth remains mired in weakness, particularly its industrial powerhouse. These issues won’t be dealt with in a couple of quarters, Germany, and thus Europe’s, problems could take many years to recover.
The immediate outlook for the euro is weak. However, since everyone expects the ECB to be bearish there may not be too much room for further downside for the euro in the short term. The outlook for the euro and for European assets in 2025 could be dependent on a few factors: stability in energy prices, stable election results in France and Germany, and a path to peace in Ukraine. The later point could see European stocks surge and it may benefit the euro too. However, at this stage it is too early to know if it is a realistic probability.
Elsewhere, stocks in Europe are rising, after a benign inflation report in the US has virtually guaranteed a rate cut from the federal reserve next week. Also, the French president is expected to announce his pick for PM after the collapse of the Barnier government last week. We do not think that his choice will have a large impact on French bond yields because the real test is next year’s budget deficit figures. Until then, French debt could fade as a major concern for markets.
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