ECB members strongly hint at rate cut next week

EUR moved lower in the afternoon, erasing all the daily gains. The move was triggered by comments from ECB members Rehn, Villeroy and Lane. Each of the three central bankers has hinted that a rate cut next month is coming. 

Rehn said that inflation converging to 2% target gives room for a rate cut in June, while Villeroy said outright that June cut is a done deal. As usual, ECB chief economist Lane was less expressive but even he said that June cut is appropriate if inflation outlook holds. This means that unless there are any major surprise in the May CPI readings scheduled for the second half of this week, we will most likely see ECB cutting rates by 25 basis points next Thursday.

Money markets are pricing in an almost-95% chance of ECB cutting rates by 25 basis points at the June 6 meeting. However, as cut looks like a done deal, attention will be on what comes next. Money market see a high chance of ECB delivering two more cuts this year, with September and December quarterly meetings being likely dates. However, ECB Lane warned that disinflation trend may not be as smooth during the rest of 2024 and ECB should be wary of over-easing. New set of ECB projections at the next week's meeting may help markets and economists make up their mind.

ECB Lane

• Bulk of tightening impact on inflation is comparatively backloaded, with substantial pass-through still expected to transpire in the period ahead
• ECB wage tracker is signalling that overall wage pressures have moderated since 2023
• Breadth of the domestic inflation dynamic is narrowing
• It is straightforward that the calibration of the appropriate degree of restrictiveness should adjust for the impact of lower expected inflation
• Even if inflation does not smoothly decline during the rest of 2024, further disinflation can be expected in the course of 2025
• Keeping rates overly restrictive for too long could push inflation below target over the medium term. This would require corrective action that could even require having to descend to below-neutral rate
• Easing the stance too quickly would not be consistent with inflation sustainably returning to target if inflation turns out to be more persistent than anticipated
• Disinflation is also consistent with economic recovery
• A June rate cut is appropriate if inflation outlook holds
• Effects of past rate hikes are still unfolding
• Overall message on wages is bumpy. There is some deceleration but it is slow
• We think over the coming months, inflation will bounce around the current level
• We will see another phase of disinflation, bringing us back to target later next year

ECB Villeroy

• Present market expectations for our terminal rate are not unreasonable
• I don't say that we should commit already on July, but let's keep our freedom on the timing and pace
• Barring a surprise, a June rate cut is a done deal
• For me, services inflation matters more than wages or margins
• With a deposit facility rate of 4%, we have significant room for rate cuts

ECB Rehn

• Inflation is converging to our 2% target in a sustained way, and the time is thus ripe in June to ease the monetary policy stance and start cutting rates
• This obviously assumes that the disinflationary trend will continue and there will be no further setbacks in the geopolitical situation or energy prices
• ECB is not pre-commiting to any rate path

EURUSD has been trading higher today and even managed to jump above the 1.0835 area, where the 200-hour moving average, short-term trendline and previous price reactions can be found. However, comments from ECB members, especially Villeroy and Lane in the early afternoon, led to a reversal, with pair dropping back below the aforementioned resistance levels.

Source: xStation5