Live Chat

Rate cut in focus at June ECB meeting

Recession Incoming?

Inflation has been the big worry all year – the no/soft landing narrative took over. Now inflation has been sticky but not blown up in our faces. So, recession is once again back on people’s minds. After some softer US data this week Friday’s jobs report will be key.

And before that we have the ECB meeting on Thursday – the emerging story is one of reconvergence taking over from divergence with the US-German 10-year spread down to 180bps from 220bps in mid-April. Meanwhile the Bank of Canada is seen cutting today. Also watch for the US ISM services and ADP payrolls.

US Treasury yields declined to a three-week low as job openings fell sharply — the case for a rate cut is building, although it seems likely that it is a bit too late for the FOMC to pull the trigger in June.

Wall Street finished higher and European shares are firmer in early trade this morning with shares in London up about 0.3% and Frankfurt and Paris up around half a percent. The oil price fell again after a bumper API build but has stabilised a bit this morning.

Choose your points of movement

Сalculate your hypothetical P/L (aggregated cost and charges) if you had opened a trade today.

Market

Currency Search
Currency
Index
Shares
ETFs
Bonds
Crypto
Commodity

Instrument

Search
Clear input
Occidental
Siemens
Morgan Stanley
GSX Techedu
Marston's
Alibaba
Skillz Inc
Macy's
Lemonade
Lululemon
Plug Power
Amazon.com
Verizon
Thermo Fisher
Mondelez
General Motors
LVMH
IAG
Cinemark
PETROCHINA
Royal Bank Canada
Anglo American
F5 Networks
Nikola Corporation
Zoom Video Communications
Air France-KLM
Comcast
UniCredit
The Cheesecake Factory
Barrick Gold
Bayer
Toro
Kuaishou
Gen Digital Inc
Tilray
Xiaomi
SMCI
Wish.com Inc
Adobe
DISNEY
Coinbase Inc
UiPath Inc
T-Mobile
Rio Tinto
Schlumberger
Invesco Mortgage
Hammerson
Volkswagen
Sartorius AG
ROBLOX Corp
ChargePoint Holdings Inc
UPS
Pinterest Inc
Continental
Jumia Technologies
Medtronic
PayPal
Twilio
Freeport McMoRan
UnitedHealth
SIG
Tesla
Lyft
Boeing Co
Annaly Capital
Santander
Teladoc
Li Auto
CrowdStrike Holdings
Deere
Fedex
Naspers
ProSiebenSat.1
Bilibili Inc
Costco
New Oriental
NVIDIA
Iberdrola
Gilead
American Express
Apple
Airbus
GoPro
Chevron
HSBC HK
Two Harbors Investment aration
easyJet
Inditex
BlackBerry
Anheuser-Busch Inbev
Deliveroo Holdings
Hubspot
Applied Materials
GameStop
British American Tobacco
Trade Desk
McDonald's
AMC Entertainment Holdings
Adidas
AIA
Bristol Myers
Novavax
TUI
Fresnillo
Shell plc (LSE)
Nasdaq
Ceconomy
Lithium Americas Corp
Rivian Automotive
Qorvo
MercadoLibre.com
Coca-Cola Co (NYSE)
HDFC Bank
Roku Inc
Infinera
Arista
Total
JnJ
Dave & Buster's
PG&E
ON Semiconductor
Diageo
XPeng Inc
ASML
Vodafone
Airbus Group SE
Campari
Telecom Italia
Glencore plc
HSBC
ZIM Integrated Shipping Services Ltd
Kraft Heinz
Spotify
Aurora Cannabis Inc
Etsy
Goldman Sachs
Norwegian Air Shuttle
Abbott
Snap
Linde PLC
Blackstone
Cellnex
Tencent
Barclays
Virgin Galactic
JP Morgan
Allianz
RTX Corp
Taiwan Semi
Wal-Mart Stores
Intel
DoorDash
Wayfair
SONY
II-VI
Norwegian Cruise Line
BioNTech
Palantir Technologies Inc
CNOOC
Cisco Systems
Electrolux
ALIBABA HK
Robinhood
Vonovia
British American Tobacco
SAP
Ford
Cameco
Peloton Interactive Inc.
Toyota
Amgen
AT&T
Infosys
Starbucks
Lloyds
Qualcomm
Canopy Growth
3D Systems
CarMax
LUCID
Eni
AMD
Target
IBM
FirstRand
Lumentum Holdings
Alphabet (Google)
Workday Inc
ASOS
Conoco Phillips
Moderna Inc
Trump Media & Technology Group
Fuelcell
MerckCo USA
Salesforce.com
Hermes
BASF
AstraZeneca
Christian Dior
Broadcom
Oracle
Vipshop
CCB (Asia)
Nio
Block
Uber
Accenture
Meta (Formerly Facebook)
Berkshire Hathaway
Wells Fargo
Blackrock
Rolls-Royce
Pfizer
Microsoft
Home Depot
Mastercard
Lufthansa
Marriott
AbbVie
China Life
Baidu
Eli Lilly
DeltaAir
Chipotle
BP
General Electric
eBay
Quanta Services
Netflix
Micron
Visa
Golar LNG
ADT
JD.com
American Airlines
Porsche AG
Palo Alto Networks
Teleperformance
Lockheed Martin
Upstart Holdings Inc
Delivery Hero SE
Airbnb Inc
Nel ASA
GoHealth
Shopify
Aptiv PLC
Bank of America
PepsiCo
Philip Morris
Exxon Mobil
Procter & Gamble
Beyond Meat
Snowflake
L'Oreal
Sea
Porsche
Deutsche Bank
Nike
Unilever
CAT
Prosus N.V.
Unity Software
Citigroup
Upwork Inc.
Vir Biotechnology

Account Type

Direction

Quantity

Amount must be equal or higher than

Amount should be less than

Amount should be a multiple of the minimum lots increment

USD Down
$-

Value

$-

Commission

$-

Spread

-

Leverage

-

Conversion Fee

$-

Required Margin

$-

Overnight Swaps

$-
Start Trading

Past performance is not a reliable indicator of future results.

All positions on instruments denominated in a currency that is different from your account currency, will be subject to a conversion fee at the position exit as well.

Interest Rate Cut at ECB Meeting Assured — What Next?

With the European Central Bank all but certain to cut rates on Thursday (June 6th), the attention will be on comments around inflation and further easing.

  • Inflation has ticked up but remains on a broadly downward trend and ECB officials have clearly already made up their minds to cut this week
  • A hawkish cut – one and done, or one-and-wait-and-see, could support Eurozone yields
  • But the US remains key for the EUR to USD pair, with the case for the Fed to cut starting to build again
  • For all the talk about divergence between central bank policymaking – particularly the ECB and Fed – the current price action is one of reconvergence, with Eurozone inflation, yields and the Euro starting to move up and Treasury yields, USD and PCE inflation falling – US/German yield spreads have narrowed a lot over recent weeks.
  • The hawkish repricing already seen could leave the door open for a retracement (lower EUR) but equally the ECB might beat a more hawkish drum than even the market assumes…
  • ...which takes us back to the point about what probably matters just as much for EURUSD is the Fed and a key nonfarm payrolls report on Friday.

ECB Meeting: Rate Cut Assured

The market is fully pricing a rate cut, which would be the first since 2019. Policymakers have been pretty vocal in saying June is “on”.

In a recent interview, ECB chief economist Philip Lane said that “at this point in time there is enough in what we see to remove the top level of restriction”. You don’t get much clearer a signal than that in central bank speak, and there has been plenty of others basically saying June will see a cut.

What Next for EU Interest Rates?

Therefore, with a rate cut a slam dunk, it’s all about the forward guidance and language around the inflation risks. A follow-up cut in July is priced at just 1/10 so anything that hints at this would be euro-negative... but unlikely.

Markets assume another cut by October, and the ECB may give a signal of sorts towards this kind of date – i.e. data dependent, think restrictive enough, likely to ease further. The move in the EUR to the upside may reflect some degree of the market assuming a hawkish cut, but this could be pushed further, and the market may not be fully attuned to the chance of the Fed now cutting more aggressively (US high frequency data has started to deteriorate).

Eurozone Inflation Pick-Up

Hawks could be nervous about the reacceleration in inflation in May, with headline CPI up from +2.4% to +2.6% and core CPI up from +2.7% to +2.9%. The benchmark German 10-year bund yield jumped to a 6-month high in response. The euro meanwhile has just hit its highest against the USD since March, partially driven by the Euro move, but perhaps mainly on the USD side – weak ISM manufacturing, falling job openings, core PCE softening all pushing down on Treasury yields and the dollar.

The problem is one of non-linear disinflation. I’ve flagged this a lot, but we are seeing it play out now – lumpy disinflation and bits that are way stickier than others. So, with three-month annualized services inflation running at 5.2%, and the one-month rate at 6.5% the ECB’s hawks will be vocal. You may wonder why a rate cut in this situation is still so nailed-on? Mainly they’ve already committed to it (almost) and at 3.75% from the current 4%, policy rates would remain restrictive. Moreover, doves can point to slower wage growth than projected in December, which may help them to overlook the slight uptick in headline and core inflation. You can choose which data to be dependent on.

However, growth seems to show fewer signs of downside risks than in March. China seems to be picking up, the German data is probably bottoming and the composite Eurozone PMI hit a one-year high of 52.3. All of which suggests fewer, slower cuts than expected (ie reconvergence).

Data Dependence

Data dependence is the new mantra for central banks. The ECB is not alone in this and whilst undeniably worthy in some ways, comes with the price of always being “behind the curve” somewhat. What it means for us is that the ECB is unlikely to pre-commit to further hikes, given the stubbornness of some inflation and the uncertainty over what the Fed is about to do next.

And check the US data: JOLTS down to a three-year low and experiencing the kind of decline that is associated with recessions. ISM manufacturing was bad — lowest headline since Feb, lowest prices paid since March, lowest new orders since May 2023 and now in contraction for 2 years.

Meanwhile, the Atlanta Fed’s GDPNow estimate for Q2 growth was revised down to 1.8% from 2.7%. Add to this the fact that Q1 real GDP was revised down to 1.3% q/q and real consumer spending remains negative and you get a sense that the case for rate cuts is building again.

ECB meeting to coincide with first day of EU elections

EU Elections Begin on Same Day as ECB Meeting

Also worth considering the EU elections kicking off on the same day as the ECB meeting – we have not seen much by way of geopolitical risk premium in yields, but we could start to see something in bond spreads that would tend to be net negative for EUR.

Fragmentation risks are the thing we are going to listen out for – but as yet we are not seeing much in the way of splintering of the core. Come Sunday night through this might change if right-wing parties gain a lot of ground.

In the Charts...

EURUSD has enjoyed a nice run up from 1.08 after tapping the 200-day SMA at 1.0787 to test 1.09 and pulled back from the two-month peak – long-term trend resistance not far above. MACD looks unclear but bullish momentum just about sustained for now. Diminished H4L message from the Fed could see further EUR strength.


Reconvergence may be the trade – US/German 10-year spreads down to 180bps from peak of around 220bps in mid-April – if we get further weakness in US HF data along with a hawkish-sounding ECB may see this narrow further into the weekend and could push EURUSD to test the March highs again. Caution, however, that this is an election week with political risk premia coming back to the fore and maybe underpriced.


When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.

Latest news

Eurozone inflation

Saturday, 23 November 2024

Indices

Week ahead: Eurozone inflation likely to confirm ECB December cut

Thursday, 21 November 2024

Indices

Asian Market Update: Hang Seng Index Falls on Baidu Slumps

Thursday, 21 November 2024

Indices

Stock Market Today: Dow and S&P 500 Post Gains Ahead of Nvidia Earnings

Thursday, 21 November 2024

Indices

Super Micro Stock Surges on Decision to Maintain Nasdaq Listing

Live Chat