ECB preview: lack of new data sees markets expecting a hold

The European Central Bank (ECB) will be holding its July monetary policy meeting this Thursday. Data from Reuters shows markets expect no change to policy, with a 95% chance priced in. The fact that we got a rate cut from the ECB in June pushed back expectations of another cut to September, especially as President Christine Lagarde hinted at taking it slow. Current pricing shows an 80% chance of a September cut.

The central bank made it very clear at its previous meeting that it does not want to follow a fixed schedule for determining when and how much to cut, but would rather be reactive to the data. Lagarde and her team will likely continue to avoid giving explicit guidance, and the messaging could remain mostly unchanged from June.

The latest data showed inflation dropping marginally in June after rising unexpectedly in May although that didn’t stop the central bank from cutting rates 25 basis points back then. Whilst the disinflation process has come a long way in the past 18 months, price pressures remain sticky in some areas of the economy, limiting the ECB from starting a strict cutting cycle.

From Lagarde’s comments back in June, the bank would rather take on a ‘wait and see’ approach as it enables the transmission of policy into the economy to take place, observing how rate cuts affect the economy before lowering rates further. Meanwhile, the labour market has remained strong, which allows the ECB to gather data without being forced to act to save the economy.

After the hype of the June meeting, this Thursday is expected to be a bit of a non-eventer. With the start of the summer, it is unlikely that the central bank wants to unsettle markets. It also helps that most of the Governing Council members seem to be happy with the current market expectation of two more rate cuts this year. The fact that this cutting cycle has not been triggered by a recession or crisis gives the ECB ample room to manoeuvre comfortably, which means we could see a few meetings this year when nothing much happens.

Because of this, the momentum in markets could be subdued following the meeting. EUR/USD has been on a strong bullish run in recent weeks, also helped by a weaker dollar, but the momentum has started to fade just above the 1.09 mark, with the RSI flattening out. A hold from the ECB could see some mild downside pressure on the euro as markets rebalance the recent moves. Meanwhile, European equity indices like the DAX 40 and EURO STOXX 50 have pulled back from recent highs. Commentary from Lagarde will be key to determining further appetite to push higher. A dovish tone which implies a rate cut in September could reignite some buying interest.

EUR/USD daily chart

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