ECB IS ON TRACK FOR ANOTHER RATE CUT

Keywords:

• ECB rate cut (100 – 1000)
• OBJECTIVE OF ECB’s RATE CUT
• OVERVIEW OF EUROZONE INFLATION 
• EURUSD TECHNICAL ANALYSIS 

The European Central Bank (ECB) is expected to announce 25bps rate cut today, Thursday, December 12, 2024, at 5:15pm GMT +4. If implemented, this would mark the ECB's fourth rate cut in 2024, reflecting its ongoing efforts to address challenges such as slowing economic growth and inflation containment mandate within the Eurozone.

OBJECTIVE OF ECB’s RATE CUT

Central banks, such as the European Central Bank (ECB), operate under a dual mandate: to maintain price stability and promote full employment. These objectives are important for ensuring sustainable economic growth. To achieve these objectives, central banks employ various tools, including but not limited to monetary policy measures such as adjusting interest rates, as a means of managing and stabilizing the economy.

      In periods of slow economic growth or high inflation, central banks often implement loose monetary policies, which typically involve lowering interest rates. The ECB has long grappled with periods of slow growth and low inflation, prompting it to adopt this measure similar to its peers to address sluggish economic conditions effectively. These actions aim to bring the Eurozone economy closer to its equilibrium by stimulating economic activity and keeping inflation within its 2% target.

Lower interest rates traditionally reduce borrowing costs, motivating businesses and consumers to secure loans for investment and spending, this can stimulate economic growth in the Eurozone. Given recent economic slowdowns and elevated inflation rates of 2.3% as at last reading, the ECB policy maker is likely considering further rate adjustments to foster long term economic stability. As at the time of writing, markets are slightly dovish and has priced in 90% for a 25bps cut today, while the remaining 10% tilts for a 50bps cut.

      Additionally, the ECB’s rate cuts are designed to counter economic risks, including potential U.S trade restrictions and ongoing political challenges. The anticipated trade tariffs in 2025 threatens export driven sectors, while political instability in France and Germany exacerbates economic uncertainties. These factors underline the urgency of accommodative monetary policies to safeguard growth.

OVERVIEW OF EUROZONE INFLATION 

Eurozone annual inflation rose by 0.3% in the latest reading on November 29th, reaching 2.3%, up from 2.0% in October. In September, inflation was lower at 1.7%, marking the first time in about three years that it had fallen below the 2% target. Core inflation, which excludes volatile items such as food, energy, alcohol, and tobacco, remained sticker at 2.7%. Subsequent data will provide policymakers with clearer insights for rate decisions in 2025. However, economists are forecasting further rate trims next year.
Fig.1 Eurozone inflation rate in percentage Eurostat

EURUSD TECHNICAL ANALYSIS 

The EUR/USD has been in an overall downward trend since the price broke and closed below the September 11th low of 1.1002 on the daily timeframe. On the H1 timeframe, following the U.S inflation report of yesterday and ahead of the Euro rate decision, the price recently broke above the blue trendline, which had been acting as resistance but struggles below 1.0535. Whilst currently trading at 1.0510 to retest the trendline. While the RSI is around neutral state of 51.
In view of ECB's rate cut decision, markets are anticipating volatility presenting both potential rewards and risks. If a 25bps cut or more is implemented, analysts expect the pair to experience a brief bullish move, with potential targets around 1.0535 and 1.0565. On the other hand, if the bears take control, analysts foresee a downward push with potential targets at 1.0475 and 1.0460. A further breakout these levels are not ruled out as per analyst.

Fig. 2 EURUSD H1, tradingview