ECB rate preview
Trading in the Euro Area this week will be all about Thursday’s Governing Council announcement. Downside risks to Euro Area activity have undoubtedly increased since the October meeting.
On the domestic front, political uncertainty in the bloc’s two largest countries has once again reared its ugly head, while abroad, Trump’s tariffs are set to weigh on European export demand.
We think that this will lead to a heated debate among committee members as to how to proceed, with some of the doves likely to favour a 50bp cut.
We think that a compromise will be struck, whereby a 25bp rate reduction is unveiled, while Lagarde’s remarks and the updated macroeconomic projections point to an aggressive pace of cuts ahead.
A larger-than-expected downgrade to the core inflation view would, in particular, be particularly bearish for the euro, as it could cause markets to price in a lower terminal ECB rate in 2025.
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