ECB policy meeting: another rate cut and emphasis on September’s data – Preview
ECB widely expected to deliver a second rate cut to 3.50%
September’s data could be important for October’s meeting
EURUSD looks bearish; next support could develop near 1.0990
Inflation is no longer the sole focus, as economic growth has gained equal importance, athough central banks still prioritize maintaining symmetrical price stability around 2.0%.
The story lately was that a couple of disappointing US business and employment data raised speculation that the world’s largest economy might be at the brink of a recession and could drag the rest of the world down with it as US interest rates remain unchanged at restrictive levels.
The Eurozone economy exceeded analysts’ expectations in Q2, showing ongoing growth since Q3 2023, but the pace remained modest at 0.3% q/q and 0.6% y/y, falling short of the ECB’s 2024 forecast of 0.8% y/y.
Of course, a glance at member states shows a widening gap, with tourism-led economies such as France and Italy displaying stronger GDP numbers than the struggling industrial-led Germany. The latest S&P Global business PMI report revealed that the Olympic games in France and the tourism boost in Spain and Italy could support Q3 GDP numbers. However, with Germany’s growth engines in artificial intelligence and other technological areas falling behind those of the US and China, and given the presence of geopolitical risks, it is questionable whether the bloc will attract noteworthy investment in the coming years.
![](https://www.xm.com/wp-content/uploads/2024/09/economic-growth.jpg)
As regards the labor market, the unemployment rate has been steady near a record low of 6.4%, but spending appetite was cautious as reflected by a near-zero growth in the household consumption and the falling savings ratio. Although the dynamics on the wage front are mixed across member states, with Germany demanding more increases, the latest round of negotiations within the bloc averaged at a lower level of 3.6% y/y in Q2 from 4.7% y/y in Q1, easing the risk of a wage-price spiral.
A second 25bps rate cut is a done deal. What's next?Hence, a second cut of 25bps in the deposit facility rate to 3.50% may not face strong opposition this week. Analysts believe this is a done deal, especially after ECB board member Kazaks admitted that the sideways move in inflation is consistent with further rate cuts. A few days later, headline CPI inflation broke its range to hit a three-year low of 2.2% y/y, standing marginally above the ECB’s target of 2.0%, while the core measure also eased notably to 2.8% y/y.
![](https://www.xm.com/wp-content/uploads/2024/09/CPI.jpg)
Similar to the Fed, we must ask if there is a chance for a significant 50bps rate reduction in the eurozone this year. The ECB is scheduled to update its inflation and GDP forecasts along with its rate decision and therefore it could give fresh hints about its next policy steps. However, October’s gathering could be considered a better timing for guiding investors when September’s economic figures are out.
In the meantime, futures markets are pricing in a third 25bps rate cut later his year, though they are uncertain about whether this will happen in October or December. There is also ambiguity about whether a potential reduction in December could be a double one if nothing happens in October. Overall, investors see interest rates at 2.5% by March, which suggests a back-to-back easing or a 50bps base rate cut with a break in the coming meetings.
![](https://www.xm.com/wp-content/uploads/2024/09/ECB-rate.jpg)
For the time being, policymakers might avoid any strongly dovish language and could show preference for a step-by-step policy monitoring, given the elevated prices in the services sector. If that proves to be the case, investors might translate it as a hawkish signal, helping EURUSD climb back towards its 20-day simple moving average (SMA) at 1.1084 and then up to the 1.1100 tough resistance.
From a technical perspective, today’s drop below the 20-day simple moving average shifted the attention to the 1.0990 area, while lower, the 1.0915-1.0940 zone might pause steeper declines. Yet for the bears to reach the latter, the central bank must discuss the potential for a 50bps rate cut and/or even signal a continuous easing policy into 2025.
![](https://www.xm.com/wp-content/uploads/2024/09/image-1725887508173.png)
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.