Forex Analysis & Reviews: 09.04.2024 - ECB meeting looms: what to...

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09.04.2024 03:01 PM

ECB meeting looms: what to expect

Despite increased demand for riskier assets, the European currency's bullish run is expected to be limited shortly. The primary reason for this scenario is that ECB officials are gradually preparing for the first interest rate cut, which could occur as early as June this year, especially amid rapidly slowing inflation.

However, there have been expectations of such a scenario for quite some time now. But what is more interesting is what ECB Governing council members will do next. The main question is whether there will be new steps towards monetary policy easing at the July meeting or whether they will be postponed until September.

The softer the regulator's stance will be, the more pressure will be exerted on the European currency. Recall that the ECB's decision on the key interest rate will be announced this Thursday. Even if ECB President Christine Lagarde downplays any talk of a move towards policy easing after the meeting, the fact of its discussion will limit the euro's upside potential.

Many economists believe that dovish ECB policymakers are already paving the way for further rate cuts in July this year. Greek central bank chief Yannis Stournaras has most openly advocated for two consecutive cuts before the August summer holidays. ECB board member Piero Cipollone also stated that there is a possibility of a "quick" rate cut, despite significant wage growth that has recently concerned policymakers.

Malta's Finance Minister Edward Scicluna and Bank of France Governor Francois Villeroy de Galhau are among those who do not rule out the start of monetary policy easing even this week. Other ECB representatives such as Bank of Portugal Governor Mario Centeno have emphasized that lowering borrowing costs is necessary to avoid harming the weak Eurozone economy.

However, most economists do not expect the ECB to take any measures to cut interest rates this Thursday. Many forecast that easing will begin in June, after a pause next month. Investors currently see the chance of a second step down before the summer break at just over one-in-two.

Regarding more aggressively positioned policymakers, Dutch central bank chief Klaas Knot expressed the need to focus on the quarterly forecasts to be published later, suggesting that September, not July, would be the appropriate time for a second step. Bundesbank President Joachim Nagel recently said that investors shouldn't conclude that after the first rate cut, the same will happen at every subsequent meeting.

Now let's move on to technical analysis. As for EUR/USD, demand for the euro persists. Buyers now need to take control of the 1.0875 level before targeting 1.0910. However, extending gains and reaching 1.0940 could be challenging without support from major players. The most distant target would be the peak at 1.0970. If the trading instrument falls, major buyers are expected to regain control of the market only at around 1.0845. If not, it would be wise to wait for the price to hit the 1.0820 low or open long positions from 1.0790.

As for the GBP/USD pair, bulls need to push the price up to the resistance level of 1.2680. Its breakout will make it possible to rise to 1.2725, but a surge above this mark will be quite challenging. The most distant target would be the 1.2765 area, after which we can talk about a more significant rally in the British pound to 1.2800. In a bear case scenario, sellers will try to take control of the 1.2645 mark. If successful, breaking through this range will deal a serious blow to bulls' positions and drag the GBP/USD pair down to the low of 1.2610 and then probably to the 1.2570 level.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.