ECB to Cut, but Will it Support EURUSD

The ECB is widely expected to cut interest rates again, but whether it communicates the timing of the expected pause could determine the market's reaction.

The Final Rate Cut for the ECB?

, with the market pricing in a 25-basis-point cut at the conclusion of the monetary policy meeting on Thursday. That would mark the seventh consecutive rate cut, making Europe's central bank the most aggressive in easing during this cycle. However, the majority of economists also believe that the next ECB meeting will be a ‘hold’ for the bank, which could mark the end of the current cycle. As interest rates are currently around neutral, this may be interpreted as neither restricting economic growth nor stimulating the economy with cheaper borrowing.

was bolstered earlier this week when flash CPI figures for May came in below expectations and the ECB's own target by one decimal point at 1.9%. The core rate remained high at 2.3% but also below expectations of 2.4%.  Following the data release, markets continued pricing in this week's rate cut and an additional rate cut in the fourth quarter, implying an extensive pause in easing through the summer. With interest rates expected to end the year at 1.75%, this contrasts with expectations of 3.75% at the Fed by the same period.

The Gap Might Not Be Enough

Market expectations do not guarantee the ECB will deliver. ECB President Christine Lagarde has been sticking to the narrative that , which makes it hard for the central bank to provide specific guidance. In that sense, the markets are likely to be disappointed by a lack of clear guidance in the central bank's policy statement and even during the press conference, since it is unlikely for Lagarde to rule out further easing explicitly. However, traders could focus on an emphasis on being near neutrality, which would suggest a consensus among policymakers that easing has sufficient momentum.

Given the widening interest rate gap between the euro and the dollar, EURUSD should have traded lower this year. However, the opposite has occurred so far, with the . The dollar index has fallen 8% since the start of the year, which reflects the bulk of the gains in the EURUSD. As the ECB and EU try to project stability amid uncertainty sparked by US tariffs, investors have been shifting assets across the Atlantic, with further easing from the shared central bank potentially supporting the euro in the medium term. Lower rates could be seen as supporting the European economy and making investment there more appealing. However, the initial reaction to the ECB rate decision could fade quickly.

EURUSD Breaks Pennant Range

The EURUSD pair has recently surged past a potential pennant and flipped the resistance to support near 1.1370. Maintaining a bullish position outside the pattern could see prices accelerate above the regional peak of 1.1457 and towards the swing high of 1.1580, eventually exposing 1.16 and beyond. Meanwhile, the rejection at the 78.6% Fibonacci retracement of the 1.1580-1.1066 range at 1.1460 is alarming. Sliding back into the pennant’s territory might not change the current dynamics much, but losing the swing support at 1.12 might do, with interim support sitting at 1.11.

SpreadEx / EURUSD

Key Takeaways

The ECB is expected to proceed with its final rate cut on Thursday. However, euro traders might focus more on communications surrounding neutrality than the timing of the ‘hold’, as Lagarde is unlikely to offer much clarity on guidance due to tariff uncertainty. Despite the widening interest rate gap between the EU and the US, the EURUSD has risen this year, reflecting a loss of confidence in the US and a more appealing investment profile in the EU, which offers lower borrowing costs.