Eyes on the ECB Decision Today
The European Central Bank (ECB) is poised to cut interest rates for the fourth time this year, aiming to support the eurozone’s weakening economy as inflation edges closer to the 2% target.
According to a Bloomberg survey, nearly all analysts expect a 0.25% reduction in the deposit rate today, bringing it down to 3%. Only JPMorgan Chase forecasts a larger 0.5% cut, citing softening growth and inflation indicators.
Balancing Economic Risks
ECB policymakers remain concerned about sluggish economic activity potentially driving inflation below target. Adding to their challenges are political uncertainties in major economies like Germany and France, alongside evaluating the global implications of U.S. economic policies.
Despite these risks, the ECB is likely to maintain a cautious approach, preferring incremental rate adjustments. Fresh quarterly projections to be released this week are expected to highlight weaker GDP growth and subdued inflation for 2025.
Interest Rate Strategy
When the ECB delivered its third rate cut in October, discussions of a 0.5% reduction gained traction amid grim economic conditions. However, stronger-than-expected third-quarter GDP figures tempered the urgency for a large move.
Economists now anticipate gradual quarter-point reductions until the deposit rate reaches 2%. On Thursday, the ECB may revise its policy language, signaling flexibility while retaining its “meeting-by-meeting” approach.
Longer-Term Considerations
As policymakers debate whether rates should fall below the “neutral” level—estimated at around 2%—opinions vary. While some, like France’s François Villeroy de Galhau, support exploring this option, others caution against overstepping. Executive Board member Isabel Schnabel has warned that excessive cuts could erode the ECB’s ability to respond to future crises.
Economic Outlook
The ECB had previously predicted a recovery driven by higher wages and increased household spending, with GDP growth projected to reach 1.3% in 2025 and 1.5% in 2026. However, recent surveys show a deepening slump in manufacturing spreading to services, making these forecasts appear overly optimistic. Analysts now expect the 2025 GDP growth forecast to be revised downward.
For inflation, a modest rise to 2.3% last month has kept it largely under control. Projections for 2024 and 2025 are expected to be downgraded, while 2026 inflation estimates remain at around 2%. This week’s release will also provide the first glimpse of projections for 2027.
Political Uncertainty
France’s ongoing budgetary impasse has fueled volatility in its debt markets, with bond yields briefly aligning with those of Greece. This turmoil has reignited speculation about the ECB’s emergency bond-buying tool, though Bundesbank President Joachim Nagel has emphasized its limited scope for addressing political risks.
As ECB President Christine Lagarde prepares to address these topics in her press conference, markets will watch closely for clues on future policy direction.
EURUSD Remains Above 1.05
Since mid-November, the EURUSD exchange rate has been trading within a narrow range and has consistently held above 1.05, even though it briefly dipped to 1.0330 on November 22nd. This indicates that 1.05 is viewed as a strong support level with considerable demand. However, today’s situation may shift based on the outcomes of the ECB’s decisions.
From a technical perspective, as long as the Euro stays above 1.05, another upward move is likely, unless the ECB adopts a more dovish stance or presents a bleak economic outlook. In that case, 1.0330 might be the next target. Conversely, 1.06 and 1.0660 could emerge as the next significant resistance levels to monitor.
Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.
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