Heading into Thursday’s European Central Bank meeting, the market is almost fully priced for a 25bp cut. This means the market will be mainly looking for hints about future rate trajectories during the press conference. A downwardly revised inflation projection and a balance of risks around the growth outlook, perhaps more clearly pointing to the downside, would generally paint a dovish backdrop, but given the uncertain environment around trade specifically, one should not expect any concrete hints from President Lagarde.
The market still anticipates at least one more cut by the end of the year, bringing the deposit facility rate to 1.75%. There is a moderate chance of further cuts, but pricing is largely influenced by sentiment around US-EU trade relations these days and its feed through to activity this side of the Atlantic – the US data on Wednesday did not move the needle here at all.
Between the tariff news and Germany’s fiscal U-turn in March, markets have established a range for the terminal deposit facility rate of 1.5% to 2%. Currently, at the lower end of this range, a slightly dovish tone from the ECB now is unlikely to change the overall picture, keeping pricing in the lower half of the range. A significant drop in rates would likely require a series of weaker data points. However, the downside in rates is limited by the prospect of increased EU defence spending and fiscal stimulus from Germany.