- A 25 basis point cut to the ECB deposit facility rate is widely anticipated, marking the seventh cut in the current cycle.
- The ECB continues to cut rates amid slow Eurozone growth, while the Federal Reserve pauses, creating a notable divergence in monetary policy.
- What next for EUR/USD?
A 25 basis point cut to the ECB deposit facility rate is fully expected today. However, the chances of another cut in April are less certain, with markets now pricing in a 50/50 probability of a cut.. The market is now focusing on a possible pattern of quarterly rate cuts after this week. Investors are also considering whether the ECB might eventually lower rates below 2%, as forward rates for the end of the year are currently priced at 70 bps which would leave rates at 2.5%.
While U.S. tariffs could still impact the economic outlook, the chances of the ECB cutting rates faster or more deeply have lessened. This shift comes after recent inflation data showed a smaller-than-expected decline, reducing pressure on the ECB to act aggressively.
Source: LSEG
What to Expect from the ECB’s Decision
Today’s decision is expected to mark the ECB’s seventh rate cut during its current cycle of reducing rates. Over the past year, the central bank has lowered rates by 150 basis points, with another 25-basis-point cut likely today. This would bring the rate close to the estimated neutral range of 1.5% to 2.5%, marking an important point in the ECB’s policy decisions.
The reason for this expected cut is the slow economic growth across the eurozone and lower inflation pressures. January’s inflation data for the euro area showed that core inflation is cooling down. To boost demand, the ECB is under pressure to ease financial conditions even more.
The Debate Over “Restrictive” Policy
A major topic in today’s meeting is whether ECB President Christine Lagarde will keep calling the current policy “restrictive.” Some hawkish members of the Governing Council believe the policy is no longer restrictive, given the recent rate cuts and other easing steps. However, more dovish policymakers point to Europe’s ongoing economic challenges and uncertainty with growth and inflation as reasons to continue monetary support.
Markets will pay close attention to Lagarde’s comments in the press conference. If she signals a move away from describing the policy as “restrictive,” it could lead to changes in market expectations and affect the value of the euro.
Diverging Policies: ECB vs. Federal Reserve
The ECB and the Federal Reserve are taking very different approaches to monetary policy. The Fed is being cautious and has paused its rate hikes as the U.S. economy shows signs of slowing. Meanwhile, the ECB is continuing to cut rates.
This difference has caused the euro-dollar rate spread to narrow, giving the euro an advantage in recent trading. If the ECB stays focused on easing policies without hinting at big changes, the euro could remain strong against the dollar in the short term.
Final Thoughts
The recent strength and rise in EUR/USD hasn’t been driven much by ECB actions. Instead, it’s been more influenced by weak U.S. economic data and hopes for a ceasefire between Ukraine and Russia.
Looking ahead, U.S. tariffs on the EU will play a major role in moving the EUR/USD rate. Over the medium term I do expect EUR/USD to weaken. This view also depends on the ECB cutting rates by at least another 50 basis points to reach 2.0%.
Technical Analysis – EUR/USD
From a technical standpoint, EUR/USD is currently enjoying one of its strongest weekly gains in recent memory. The question is will it be able to hold onto these gains through the ECB meeting and the US jobs data on Friday?
The question is how far can the Euro rally at this stage?
Weak US data and recessionary fears are really weighing on the US Dollar of late. Despite the recent concerns around inflation expectations and tariff announcements, the US Dollars selloff has been swift.
There is scope for further upside but the RSI on a daily timeframe has already entered overbought territory, providing one warning sign. Given that we have NFP jobs data tomorrow it may not be wise to try and chase further gains to the upside.
Immediate resistance rests at 1.0840 before the 1.0904 and 1.0948 comes into focus.
A move lower may find support 1.0755 before the 1.0700 and 1.0600 handles become the areas of focus.
EUR/USD Daily Chart, March 6, 2025
Source: TradingView (click to enlarge)
Support
- 1.0755
- 1.0700
- 1.0600
Resistance
- 1.0840
- 1.0904
- 1.0948
