Reply To: Traders Market Weekly: Fed and BOJ Dribble Ahead


ECB Delivers Expected Cut; Next One In September (Most Likely)

The ECB surprised no one today with its first rate cut after a five-meeting run of unchanged rates; the deposit facility rate will now sit at 3.75%, down from 4.00%.

Although the ECB feels the time is right to cut and it acknowledges “progress over recent quarters”, the bank’s statement was taken somewhat hawkishly by markets given worries about wage growth and upward revision to inflation forecasts.

We expect the ECB will have enough information by the September meeting to cut again by 25bps, but it will not know enough by July to cut then; we also continue to forecast a total of 100bps in cuts through 2024.

Lagarde’s press conference saw some choppiness in markets, but she held her cards close to her chest. The market reaction was sharp on the statement, with a jump in yields on the ‘hawkish cut’ but range-bound throughout the presser.

The market reaction was sharp on the statement, but range-bound throughout the presser aside from the short-lived chop on the dialing-back phase comments.

At the conclusion of Lagarde’s presser (cutoff time for market levels here), German 2yr and 10yr yields are up about 3bps versus pre-decision (and a net ~5bps higher vs USTs after some ULC revisions). The EUR is fractionally higher against the USD in the high 1.08s and also barely firmer against the GBP. The market has taken out some in terms of expected cuts by year-end, roughly 4bps less to see a total of ~60bps (today’s 25bps inclusive). We think this undershoots what the ECB will deliver, at least 75bps in total.