• ECB meets on Thursday; a rate cut is expected

• Market will look for hints of back-to-back rate cuts

• A dovish rate cut could match expectations and push euro/dollar lower

• Decision will be announced on Thursday 12:15 GMT, press conference at 12:45 GMT

On Thursday, the ECB will hold its fourth rate-setting meeting for 2024. The rhetoric from ECB officials since the April 11 gathering leaves little doubt about the outcome. The much-awaited rate decision will be announced at 12:15 GMT by a press statement with the usual press conference following 30 minutes later.

Since the April ECB meeting, data releases in the euro area have been positive. The recent business surveys and the continued tightness of the labour market portray an economy in recovery. However, keeping rates stable on Thursday following the barrage of dovish commentary could be an enormous hit on ECB’s credibility, which is already in tatters following 2021-2023 inflation jump. Therefore, ECB members are expected to ignore the recent pick-up in inflation and announce the much-awaited rate cut.

The market is somewhat worried about the fact that the ECB will make the first move, ahead of the Fed, for the first time in its short history. Up to now, the Fed has always been dictating the start, the end, and the pace of any monetary policy cycle. But with US inflation remaining sticky and the US Presidential elections being only a few months away, Chairman Powell et al have opted to stay on the sidelines.

Interestingly, the fact that the ECB is making the first move could be interpreted in several ways. One could assume that the Fed is falling behind the curve for the first time in a while, or that the ECB could be making a mistake, like ex-President’s Trichet rate hike move in the summer of 2008, by cutting rates now that the economy is recovering.

With the rate cut decision being pretty much pre-announced the market’s reaction would depend on three factors:

(a) the size of the rate. Certain ultra-doves tried to pitch the idea for a 50bps rate move. Their aim was to send a very strong message to the market about the ECB’s willingness to ensure inflation does not undershoot. However, this plan has probably been abandoned following Friday’s hotter CPI report.

(b) the new Eurosystem staff projections. In March, the inflation projection for 2026 stood at 1.9%, in line with ECB’s price stability target. A significant revision of this figure could determine ECB’s strategy during 2024.

(c) President Lagarde’s comments about the July meeting. ECB members have been publicly debating about the need for back-to-back rate cuts and hence Lagarde’s comments on this issue could give a strong indication of the behind-the-door discussions.

The market is currently expecting a 25bps rate cut on Thursday, small revisions of the inflation projections and for President Lagarde to keep the door open to a July move. In this case, the euro/dollar is expected to test the busy 1.0772-1.0806 area.

Should President Lagarde et al decide to cut rates but refrain for commenting on the July meeting’s outcome, giving the impression that there was no widespread support for a similar-sized move in 45 days, the euro could get a boost with the recent high of 1.0894 being the first target.

On the flip side, a 25bps rate cut coupled with brave downward revisions in the inflation projections and Lagarde talking about the need for further action would constitute a dovish cut and thus potentially push euro/dollar towards the 1.0727-1.0735 range.