On Thursday, traders reduced their bets on consecutive rate cuts from the European Central Bank for the remainder of the year since officials gave little indication of how willing they were to intensify monetary easing.
Shortly after the conclusion of the ECB meeting on Thursday, sources also told Reuters that, absent a significant worsening of the growth forecast, a further rate decrease at the central bank’s next meeting in October was improbable.
As anticipated, the bank today lowered rates for the second time this cycle, bringing its benchmark deposit rate down to 3.50%. However, it emphasized that services inflation is still quite strong and that rates will remain appropriately low for as long as necessary.
According to ECB head Christine Lagarde, the rate path was not set in stone and the central bank will make rate decisions meeting by meeting without making any commitments in advance.
Before the meeting, traders had been betting on a further 25 basis point drop, which they lowered to about 20% from above 30%.
They now anticipate 33 bps of cuts for the entire year, in addition to Thursday’s decision, down from 36 bps earlier on Thursday.
Piet Christiansen, chief analyst at Danske Bank, stated that Merkel “did exactly what she wants to do,” which is to avoid upsetting the markets.
“It appears that she is content for the time being with the market price, which consists of about 25 basis points (cutting) per quarter.”
Government bond yields in the euro zone surged as traders reduced their expectations of rate cuts.
Sensitive to those moves, Germany’s two-year yield increased by around 10 basis points during the day, marking the largest daily increase in almost a month.
The euro increased somewhat, closing at $1.10393, up 0.25%. European equities closed Thursday’s trading session higher (.STOXX), opening a new page.
This year, traders anticipate that the Fed will lower rates by approximately 100 basis points, beginning with a 25 basis point reduction. This implies that three meetings will see a massive 50 basis point cut.
The Fed is expected to have implemented ten 25 basis point cuts by the end of the next year, while the ECB is expected to implement six.
Experts predicted that the ECB would need to take the strength of the euro into consideration, given that the currency would influence the primary channel via which Fed decisions are made.
An undesirable tightening of financial conditions for the weak economy of the union could result from a stronger euro.
An “aggressive” Fed decision next week, according to Danske Bank’s Christiansen, could be one element that helps raise the stakes for the ECB’s October meeting, though markets currently see about a 20% possibility of a 50 bps drop.
Analysts see minimal improvement for the euro in the near future, despite the ECB reducing its cutbacks. Not far from a peak it touched in August, a recent Reuters poll predicted it would rise to just $1.11 by the end of February and $1.12 in a year.
According to James Athey, fixed interest fund manager, anyone long the euro would be “relying on a basically pro-growth environment where the rest of the globe is outperforming the U.S.”
