It looks like we’ll be seeing the majority of analysts having to change their calls on the ECB outlook in the week(s) ahead. The meeting decision yesterday was expected but it was this leaked report that is causing traders to reprice expectations a fair bit more. Most quarters of the market were expecting the ECB to resume cutting in September and then perhaps one more in December. But now, that seems to be off the table.
If that is the case, why didn’t the euro run much higher? Well, it comes down to what was priced in before yesterday.
Going into yesterday’s decision, money markets were just pricing in ~26 bps of rate cuts by year-end. That’s already one rate cut less than what the majority of analysts were calling for. And today, that pricing has shifted further to be just ~15 bps of rate cuts by year-end. In other words, it’s closer to a 50-50 now on whether the ECB will cut rates one more time for the remainder of the year.
As a reminder, there’s just three more meetings to go – being in September, October, and December.
And policymakers have made clear that the current deposit facility rate at 2.00% is sitting within the neutral rate estimates of roughly around 1.75% to 2.25%. So, the ECB can be comfortable in not wanting to act further.
Amid a stronger euro as well, there are risks of undershooting on the inflation front. Policymakers will keep denying that but we’ve already seen de Guindos draw a line on that at 1.20 for EUR/USD. So, it is something on their radars definitely.
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This article was written by Justin Low at investinglive.com.