Euro remains stable as ECB cuts interest rates by 25bps

As expected, the ECB cut rates by 25bps in Thursday’s meeting, a move that had been anticipated for several months and was fully priced in. Following the decision, the euro remained steady and even experienced a slight rally against the pound and the US dollar.

There were no indications of when the next rate cut might occur, as the ECB emphasized its commitment to remaining data-dependent. Considering recent persistent inflation and wage growth data, the next move could be several months away.

On Thursday, the ECB cut rates in a widely anticipated move that had been expected for several months. Had this move not already been priced in and considered a certainty, the Bank might have opted to delay the cuts for a few more months, given recent data showing persistent inflation and a resilient eurozone economy.

The BoE and Fed managed to buy more time before making any firm commitment to cut rates, but the ECB’s dovish messaging left them with little room to maneuver. A U-turn would have caused them to lose credibility.

Thursday’s 25bps cut reduced the main refinancing rate from 4.5% to 4.25% and lowered the deposit rate to 3.75%. There were no indications of additional cuts in upcoming meetings, as the ECB intends to remain flexible and data-dependent, avoiding a pre-determined path like the one leading up to this meeting.

Despite the cut being a dovish move, the euro demonstrated relative strength following the decision, pushing the pound down by 0.2% and lifting EURUSD by 0.15%. The statement included some hawkish remarks, emphasizing the ECB's commitment to tackling inflation if it fails to moderate further.

President Lagarde elaborated on the rate cut during the subsequent press conference, stating that the decision was justified by increased confidence in the economic outlook. She noted that confidence has grown in recent months and the Bank anticipates inflation to fluctuate around current levels in 2024.

Lagarde also discussed the economy, highlighting that while medium-term growth risks are tilted to the downside, near-term risks are balanced. She noted that credit dynamics remain weak, but euro-area banks continue to show resilience.

A rate cut under these circumstances appears reasonable. However, if the next few CPI readings show further increases, it may begin to appear premature. Wage growth and services inflation remain significantly above comfort levels, and unless they decline rapidly, the ECB is likely to maintain rates before considering further cuts later in the year. This stance could help keep the euro stable, and the strong support level for EURGBP at 0.85 is unlikely to be breached.

‍