EURUSD hovering around a five-month low on ECB rate cut hopes

On Thursday (11th April), some focus of the market was on the ECB’s monetary policy decision. As unanimously expected, on Thursday ECB held all key policy rates for the 5th consecutive time; i.e. reference interest rates on the main refinancing operations (MRO-interbank rate) at +4.50%; interest rates on the marginal lending facility (MLF-repo rate) at +4.75%, and interest rate on deposit facility (DRF-reverse repo) at +4.00%, all are at 22-years high (since Oct’2008) after 10th consecutive rate hikes till Sep’23 (cumulating +450 bps since July’22).

The ECB maintained its interest rates at historically high levels during the Apr’24 meeting. The ECB also said it may consider reducing the level of policy restriction if it becomes more confident that inflation is moving steadily toward the 2% target. ECB also acknowledged that inflation has continued to decline, with most measures of underlying inflation and wage growth easing. However, the ECB cautioned that domestic price pressures remain strong, leading to high service price inflation. During the ECB’s presser, President Lagarde said the ECB is not pre-committing to a particular rate path, and future moves will be data-dependent. Overall, the was less hawkish hold by the ECB as like the Fed, the ECB now also needs more confidence about the disinflation process before going for any rate cuts.

ECB MRO-INTERBANK RATE +4.50% (Ref. policy rate)

Full Text of ECB statement: Monetary policy decisions: 11th April’24

“The Governing Council today decided to keep the three key ECB interest rates unchanged. The incoming information has broadly confirmed the Governing Council’s previous assessment of the medium-term inflation outlook. Inflation has continued to fall, led by lower food and goods price inflation. Most measures of underlying inflation are easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labor costs in their profits. Financing conditions remain restrictive and the past interest rate increases continue to weigh on demand, which is helping to push down inflation. But domestic price pressures are strong and are keeping services price inflation high.

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It considers that the key ECB interest rates are at levels that are making a substantial contribution to the ongoing disinflation process. The Governing Council’s future decisions will ensure that its policy rates will stay sufficiently restrictive for as long as necessary.

If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction. In any event, the Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, and it is not pre-committing to a particular rate path.

Key ECB interest rates

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively.

Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)

The APP portfolio is declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities.

The Governing Council intends to continue to reinvest, in full, the principal payments from maturing securities purchased under the PEPP during the first half of 2024. Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024.

The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.

Refinancing operations

As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations and their ongoing repayment are contributing to its monetary policy stance.

***

The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission. Moreover, the Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate.”

Text of the opening statement by ECB President Lagarde: 11th April’24

“The Governing Council today decided to keep the three key ECB interest rates unchanged. The incoming information has broadly confirmed our previous assessment of the medium-term inflation outlook. Inflation has continued to fall, led by lower food and goods price inflation. Most measures of underlying inflation are easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labor costs in their profits. Financing conditions remain restrictive and our past interest rate increases continue to weigh on demand, which is helping to push down inflation. But domestic price pressures are strong and are keeping services price inflation high.

We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. We consider that the key ECB interest rates are at levels that are making a substantial contribution to the ongoing disinflation process. Our future decisions will ensure that our policy rates will stay sufficiently restrictive for as long as necessary. If our updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission were to further increase our confidence that inflation is converging to our target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction. In any event, we will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, and we are not pre-committing to a particular rate path.

I will now outline in more detail how we see the economy and inflation developing and will then explain our assessment of financial and monetary conditions.

Economic activity

The economy remained weak in the first quarter. While spending on services is resilient, manufacturing firms are facing weak demand and production is still subdued, especially in energy-intensive sectors. Surveys point to a gradual recovery over this year, led by services. This recovery is expected to be supported by rising real incomes, resulting from lower inflation, increased wages and improved terms of trade. In addition, the growth of euro area exports should pick up over the coming quarters, as the global economy recovers and spending shifts further towards tradable. Finally, monetary policy should exert less of a drag on demand over time.

The unemployment rate is at its lowest level since the start of the euro. At the same time, the tightness in the labour market continues to gradually decline, with employers posting fewer job vacancies.

Governments should continue to roll back energy-related support measures so that disinflation can proceed sustainably. Implementing the EU’s revised economic governance framework fully and without delay will help governments bring down budget deficits and debt ratios on a sustained basis. National fiscal and structural policies should be aimed at making the economy more productive and competitive, which would help to reduce price pressures in the medium term.

At the European level, an effective and speedy implementation of the Next Generation EU programme and a strengthening of the Single Market would help foster innovation and increase investment in green and digital transitions. More determined and concrete efforts to complete the banking union and the capital markets union would help mobilize the massive private investment necessary to achieve this, as the Governing Council stressed in its statement of 7 March 2024.

Inflation

Inflation has continued to decline, from an annual rate of 2.6 percent in February to 2.4 percent in March, according to Eurostat’s flash estimate. Food price inflation dropped to 2.7 percent in March, from 3.9 percent in February, while energy price inflation stood at -1.8 percent in March, after -3.7 percent in the previous month. Goods price inflation fell again in March, to 1.1 percent, from 1.6 percent in February. However, services price inflation remained high in March, at 4.0 per cent.

Most measures of underlying inflation fell further in February, confirming the picture of gradually diminishing price pressures. While domestic inflation remains high, wages and unit profits grew less strongly than anticipated in the last quarter of 2023, but unit labor costs remained high, in part reflecting weak productivity growth. More recent indicators point to further moderation in wage growth.

Inflation is expected to fluctuate around current levels in the coming months and then decline to our target next year, owing to weaker growth in labor costs, the unfolding effects of our restrictive monetary policy, and the fading impact of the energy crisis and the pandemic. Measures of longer-term inflation expectations remain broadly stable, with most standing around 2 percent.

Risk assessment

The risks to economic growth remain tilted to the downside. Growth could be lower if the effects of monetary policy turn out stronger than expected. A weaker world economy or a further slowdown in global trade would also weigh on euro area growth. Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East are major sources of geopolitical risk. This may result in firms and households becoming less confident about the future and global trade being disrupted. Growth could be higher if inflation comes down more quickly than expected and rising real incomes mean that spending increases by more than anticipated, or if the world economy grows more strongly than expected.

Upside risks to inflation include heightened geopolitical tensions, especially in the Middle East, which could push energy prices and freight costs higher in the near term and disrupt global trade. Inflation could also turn out higher than anticipated if wages increase by more than expected or profit margins prove more resilient. By contrast, inflation may surprise on the downside if monetary policy dampens demand more than expected, or if the economic environment in the rest of the world worsens unexpectedly.

Financial and monetary conditions

Market interest rates have been broadly stable since our March meeting and wider financing conditions remain restrictive. The average interest rate on business loans edged down to 5.1 percent in February, from 5.2 percent in January. Mortgage rates were 3.8 percent in February, down from 3.9 percent in January.

Still, elevated borrowing rates and associated cutbacks in investment plans led firms to further reduce their demand for loans in the first quarter of 2024, as reported in our latest bank lending survey. Credit standards for loans remained tight, with a further slight tightening for lending to firms and a moderate easing for mortgages.

Against this background, credit dynamics remain weak. Bank lending to firms grew marginally faster in February, at an annual rate of 0.4 percent, up from 0.2 percent in January. Growth in loans to households remained unchanged in February, at 0.3 percent on an annual basis. Broad money – as measured by M3 – grew at a subdued rate of 0.4 percent in February.

Conclusion

The Governing Council today decided to keep the three key ECB interest rates unchanged. We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. We consider that the key ECB interest rates are at levels that are making a substantial contribution to the ongoing disinflation process. Our future decisions will ensure that our policy rates will stay sufficiently restrictive for as long as necessary.

If our updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission were to further increase our confidence that inflation is converging to our target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction. In any event, we will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, and we are not pre-committing to a particular rate path.

In any case, we stand ready to adjust all of our instruments within our mandate to ensure that inflation returns to our medium-term target and to preserve the smooth functioning of monetary policy transmission.

We are now ready to answer your questions.

Highlights of ECB President Lagarde’s comments during Q&A (Presser): 11th Apr’24

·         ECB Interest Rate Actual 4.5% (Forecast 4.5%, Previous 4.50%)

·         ECB Deposit Rate Actual 4% (Forecast 4%, Previous 4.00%)

·         ECB leaves key interest rates unchanged in April monetary policy meeting

·         The governing council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction

·         APP portfolio declining at a measured and predictable pace

·         We are determined to ensure inflation returns to 2% in a timely way

·         APP portfolios are declining at a measured and predictable pace, as Eurosystem no longer reinvests principal payments from maturing securities

·         Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average

·         ECB intends to discontinue reinvestments under PEPP at the end of 2024

·         ECB will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to monetary policy transmission mechanism related to the pandemic

·         ECB’s future decisions will ensure that its policy rates will stay sufficiently restrictive for as long as necessary

·         ECB intends to continue to reinvest, in full, principal payments from maturing securities purchased under PEPP during the first half of 2024

·         We consider that interest rates are at levels that are making a substantial contribution to the ongoing disinflation process

·         in any event, it will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction and is not pre-committing to a particular rate path

·         ECB today decided to keep three interest rates unchanged

·         Financing conditions remain restrictive and past interest rate increases continue to weigh on demand, which is helping to push down inflation

·         The economy remained weak in the first quarter

·         Risks to growth are tilted to the downside

·         Inflation will then decline to target next year

·         Inflation to fluctuate around current levels in coming months

·         Price pressures are gradually diminishing

·         Tightness in the labor market continues to gradually fall

·         Exports to pick up in the coming quarters

·         Manufacturing faces weak demand

·         Recovery to be supported by rising real incomes

·         Surveys point to a gradual recovery

·         Services spending is resilient

·         The economy remains weak

·         Rates may fall if we're confident inflation heading to 2%

·         Policy to stay sufficiently restrictive as long as needed

·         The balance sheet has already shrunk significantly

·         A very large majority of members wanted to wait for June

·         The US is a large market and financial center, which will find its way into our projections

·         We are not Fed-dependent; we are data-dependent

·         Few dissenters rallied around the consensus

·         A few members felt confident about inflation today

·         We'll be informed by new projection in June

·         We'll determine in June if our hope is fulfilled

·         We will get a lot more data by June

·         The economy remained weak in the first quarter

·         The balance sheet has already shrunk significantly

·         A very large majority of members wanted to wait for June

·         I don't see a financial stability crisis in commercial real estate (CRE)

·         If disinflation continues, the rate path will reflect that

·         The inflation decline won't be linear

·         A few members felt sufficiently confident to cut rates

·         We won't wait until each item in inflation is back at 2%

·         Disinflation progress is comforting us

·         I am attentive to the evolution of oil prices

·         In April, we get some data and in June we will have a lot more data and information; we will also have entire Eurosystem data; Then we will determine whether all of that confirms our hope that inflation returns to target in a sustained manner, and if as a result, our confidence is sufficiently reinforced. That is the mechanics that we will adopt, that we have resolved to adopt and that we will follow in the coming meetings.

·         Truth be told, a few members felt sufficiently confident based on the limited data that we received in April and agreed to rally to the consensus of a very large majority of the governors, who were comfortable with the need to reinforce confidence when receiving a lot more data in June

·         You asked whether the US CPI number received yesterday had any bearing on the subsequent market development. I have said in the past that we are data-dependent, we are not Fed-dependent. Those numbers were not from the Fed, they were from CPI, and anything that happens matters to us and will in due course be embedded in the projection that will be prepared and released in June. The United States is a very large market, a very sizeable economy, as well as a major financial center, so all that finds its way into our projections

·         First of all, I would not speculate what other central banks are or are not going to do. I think that, as I just responded to the previous questions, consequences in terms of impact on price stability, impact on inflation – whether it is imported inflation or otherwise – all that of course needs to be taken into account and is monitored very carefully and finds its way into our projections. So all of that will be included, embedded, monitored and taken into account in our projections. But we don't target exchange rates, and we don’t comment on exchange rates, and I'm not going to go any further than that. I would simply mention that there are multiple channels through which influence can be exercised; it’s not just through exchange rates. I think there are other channels

·         The size of our balance sheet has quite significantly reduced already and I'm sure you have followed that very carefully. The entire, very large TLTRO repayment that was coming due in March has been entirely re-payed of course and an additional amount of over EUR 30 billion has also been added to the repayment

·         In addition to that, given the APP gradual runoff, we also reduce our balance sheet by an average of about EUR 30 billion per month. That process is ongoing and will continue to happen as anticipated, as predicted, and as determined by the maturity of those bonds that come to runoff, and then we will move to the reduction of the PEPP reinvestment, from the 1st of July until the end of December. That's the plan, but there is no further discussion on that

·         You asked me about the distinction that we should or should not draw between euro area inflation and US inflation, why would we not be entirely US inflation dependent in a way, or US CPI dependent, and whether should we take our cue. We are operating in the euro area with the euro area economy for the benefit of the Europeans

·         Our objective is price stability, and we have to determine our monetary policy decisions based on the data that are produced by the euro area, based on the global environment – and that includes the United States, but it also includes China, which matters, it also includes Japan, which matters, and a lot of emerging market economies that also have a bearing – but we focus predominantly on the territory for which we have responsibility for monetary policy

·         As you know, and as I'm sure all of you in the room know, the nature of inflation in the euro area was different from the nature of inflation in the United States. Notably, the drivers of it were different, the fiscal response was different, the consumption by US consumers was different, and investments were different, so I don't think that we can draw conclusions based on an assumption that the two inflations are the same. They are not the same. The two economies are not the same. The political regimes are not the same. The fiscal policies are different. As a result, we have to focus on what we have jurisdiction over, which is the euro area, taking into account what happens in the rest of the world, but not assuming that what happens in the euro area will be the mirror of what happens in the United States. We are looking at two different things

·         We are data-dependent. We will operate meeting by meeting, and we will take into account all the data that matter and how they unfold and develop and affect our economy. As a result of that, I cannot pre-commit to any route, to easing more or easing less, unless and until we have the data and we can analyze the data. So that will take its course as the events unfold. As I said, I'm not going to speculate on the monetary policy stance and decisions of another central bank

·         On the energy market: there is one particular segment in the monetary policy statement that I wouldn't want to let go unnoticed because I think it's important, particularly in relation to energy prices, and that's the portion that relates to inflation. I'll read it again for you: inflation is expected to fluctuate around current levels in the coming months and then decline to our target next year, owing to weaker growth in labor costs, the unfolding effect of our restrictive monetary policy, and the fading impact of the energy crisis and the pandemic. A lot of those fluctuations that we refer to in that particular paragraph will be associated with the very low energy cost that we had in two episodes over the course of 2023. Obviously the price of energy as we see it unfolding in the weeks and months to come will have a bearing related to that base to which prices are compared. So declines in inflation, which we have observed so far, are not going to be linear, and we will have fluctuations around the current level, based on our projections, until it declines to our target in mid-2025. And energy prices obviously will matter in that respect

·         The ECB is a bank of all seasons, and I don’t think that we can be tied to any particular season. We will be data-dependent, and if the data continue to move in the direction of the disinflationary path that we see, then progress will be continued as well in the path that we adopt. But this is going to be data-dependent, and that is the reason why we state very clearly in the monetary policy statement that we are not pre-committing to a particular rate path. The direction is rather clear, but there is no pre-commitment to any particular path and it will all depend on the data that comes about

·         Services inflation is still at high levels

·         On your first question, you are right, and I think we point out very clearly in the monetary policy statement that services inflation is still holding at high levels. It has been at 4% for the last five months. Domestic inflation, which comprises a lot of services as well, is at 4.5% and has been there for the last three months if I recall. And this is a segment, and those are numbers and indicators, that we’re going to monitor very carefully and that we will look at very carefully. The momentum is also something that we will be very attentive to. But we’re not going to wait until everything goes back to 2% to make the decisions that will be necessary to make sure that inflation returns to 2% sustainably, at target, in a timely manner. It’s inevitable that some items will be slightly higher

·         We know that, for instance, if you look at the disaggregation of items, goods have gone down from 1.6% in February to 1.1%. So, it’s inevitable that some items and some segments will be at higher levels, and we will look at all of them to make our determination and to decide whether, on the basis of that assessment, we are confident enough. That’s the first point. On the balance of risk, I know one or two governors are keen on this balance of risk concerning inflation, but we’ve always tried to stay away from that in relation to inflation

·         Historically, we have determined whether it was to the upside, to the downside, or broadly balanced in relation to activity, not in relation to inflation. And what we prefer to do, as a matter of principle, is identify those components that will bring an upside to the risk and those that will bring a downside to the risk. That’s what we have done repeatedly in the monetary policy statement. We do that yet again, and when you look at the level of uncertainty around, it’s probably the right approach to do so in relation to inflation

·         On oil prices, they have increased, as was said by one of your colleagues, by roughly 10% in recent weeks, and this is obviously an item which matters a lot. We have learned from the recent shocks that energy costs play a significant role, and we are very attentive to those evolutions. We are largely informing our assessment on the basis of futures. So we look at how futures evolve as well. It’s not just the price of the barrel of Brent that we look at. We also try to anticipate as much as possible. It’s not perfect, but we try to use futures as an indicator of where the markets are seeing prices of oil for the future

·         We know that there will be fluctuation (in inflation). That’s the reason why we put it in the monetary policy statement. We know that there’s not going to be a linear decline in inflation over the course of the next months or quarters. But what our projections are telling us is that we will have those bumps on the road if you will, but we will reach the target in mid-2025, so a return to 2% in mid-2025. Between now and 2025, there will be ups and downs

·         And, as I said, a lot of that is related to the base effects that result from the two significant changes in energy prices in 2023. How much can we tolerate? I think what is important is the data. It’s the overall data. It’s the projection. We have embedded in our projection of last March those bumps on the road. They are in there. They are in the baseline. What we need to see is how far away from those bumps embedded in the baseline we are likely to go if we are facing supply shocks, as you suggested. But bumps will be there. It will not be linear. Bumps are embedded in the projection of March. We will take stock of that in June as well and update our projections at that point in time

·         On your second question, without being triumphant and without celebrating anything yet, what we are observing is a decline in inflation and a disinflationary process that is in progress and that is comforting to us that the monetary policy that we have adopted so far has contributed significantly to this. We will continue to operate based on the three criteria that I have mentioned several times, which are in the monetary policy statement: being particularly attentive to wages and the evolution of wages, which constitute a large contributor to services; paying close attention to profits, to make sure that unit profits absorb as much as possible of the wage increases; and continuing to be very attentive to productivity, which is also something that we expect will improve in the course of 2024

Further, on 17th April, Lagarde said:

·         We must be very attentive to FX rate changes and the Euro value

·         We will cut rates soon, barring any major surprises

·         The ECB is not Fed-dependent

·         The main difference between the US and Europe is the consumer

·         The ECB sees inflation at a 2% target sustainably in mid-2025

·         The path to 2% inflation will be bumpy

·         Declines to comment on market view on 3 cuts in 2024

·         We need a bit more confidence in the disinflation process

·         We are observing a disinflationary process that is moving according to our expectations

·         The ECB is monitoring oil prices closely

·         Geopolitics impacts confidence and commodity prices

·         The ECB will cut rates soon, barring any major surprises; notes bank is ‘extremely attentive’ to oil

Conclusions:

In Mar’24, the annual Euro Zone Core CPI (w/o energy, food, alcohol, and tobacco) fell to +2.9% from +3.1% sequentially, the lowest since Feb’22 after the 8th consecutive decline and an average +4.95% in 2023. The 6M rolling average of EZ Core CPI is now around +3.43%, while service inflation stuck at +4.0% for the last 5 months (since Nov’23), and real GDP growth is around +0.4% in 2023 after almost zero growth in H2CY23.

Looking at the previous sequential run rate trend, the average core CPI in 2024 should be around +2.7%, while it may reach around +2.2% by Dec’25, in line with ECB projections. For this to happen, the average sequential core CPI would have to fall from present +0.3% to +0.2% in 2024 and +0.15% in 2025. Thus there is a need to maintain a real positive rate, restrictive enough to bring inflation back to +2.0% targets by early 2026 or at least by Dec’25 on an average; considering expected elevated oil at least till Nov’24 (US election), disinflation process may be bumpy rather than linear.

Europe/EU is the real victim of the Russia-Ukraine and Israel-Hamas war as it’s an import-oriented economy for both fuel and food; i.e. imported inflation is the main issue here amid weaker EURUSD. Euro Area economy may be now in a stagflation-like situation (lower/negative economic growth and higher inflation). Apart from supply chain disruptions, Eurozone core inflation was also boosted by wage growth, pent-up demand, especially for services, and increasing pricing power of producers. EU is the biggest loser of the lingering Russia-Ukraine/NATO war/proxy war as it’s a net importer of both food and fuel coupled with other commodities and a weaker EUR.

As per Taylor’s rule, for the Eurozone:

Recommended policy repo rate (I) = A+B+(C+D)*(E-B) =0.00+2.00+ (0+0)*(5.0-2.00) =0+2+3.0=5.0%

Here for EU /ECB

A=desired real interest rate=0.00; B= inflation target =2.00; C= permissible factor from deviation of inflation target=0; D= permissible factor from deviation of output target from potential=0.00; E= Estimated average core inflation=5.0% (for 2023~4.95%)

The repo rate of the ECB is now at +4.75% against Taylor’s rule suggestion of +5.0%. Even if we adjust -1% real GDP output gap (2023 growth around +0.4% against potential/desired run rate +1.50%), the desired repo rate for 2024 should be around +4.00%. Growing real policy divergence between the Fed and ECB along with a stagflation-like scenario in the EU is keeping EURUSD under stress, causing more imported inflation as the EU depends on both fuel and food imports.

Thus despite the ECB narrative of translantic divergence, the ECB may have to follow the Fed in real policy action, whatever may be the narrative. Thus ECB/Lagarde mentioned the Fed key word ‘confidence’ (about the disinflation process) several times. ECB will scrutinize the 6M rolling average of inflation and GDP growth data in June along with staff outlook and also Euro System data, and may go for -75 bps rate cuts in 2024 in Sep’24, Oct’24, and Dec’24 only if the Fed goes for the same, also from Sep’24.

Alternatively, if the Fed chooses not to go for any rate cuts in 2024 due to the slow disinflation process, the US election in Nov’24 to avoid political controversy/bias and also to finish the QT first by Mar’25 before going for any rate cuts (to avoid two contradictory step: QT+ rate cuts), then ECB also has no option but to continue hold to keep present policy differential with Fed and avoid higher imported inflation. In that scenario, the ECB may go for -100 bps rate cuts each in 2024 and 2025 (in line with Fed).

ECB is now doing QT for APP by around –€0.03T/month and also executing back door QE for the PEPP portfolio. Looking ahead, ECB will complete the APP QT by May’24 and then PEPP QT in H2CY24 at €0.008T/M (total reduction around €0.05T for B/S size around €6.50T and ideally then go for rate cuts in 2025 (in line with Fed) to avoid confusion and using two contradictory tools at the same time (QT+ rate cuts?).

Technical trading levels: EURUSD

Whatever the narrative, technically EURUSD (1.06700) now has to sustain above 1.0600 for any rebound 1.07500/1.08500-1.09000/1.10000* and rally further to 1.11500/1.11800-1.12500/1.13000* and 1/14500-1.17400 in the coming days; otherwise sustaining below 1.05800, may further fall to 1.05300/1.05000* and even 1.0000/0.95000 in the coming days (in case ECB goes for rate cuts despite Fed being on hold).

BOTTOM LINE:

ECB may not diverge from the Fed in rate cuts as that would result in parity; ECB may cut rates from Sep’24, only if the Fed goes for the same