ECB 25bp rate cut fully priced in

Matthew Ryan, CFA Ebury

The world is looking at the euro as the most obvious substitute for the dollar as a store of value and a safe-haven, with markets that are large and liquid enough to accommodate the inflow.

Unsurprisingly, the common currency is the best performing currency worldwide after the Swiss franc since the ironically named "Liberation Day".

The EUR/USD exchange rate is up a whopping 5% since 2nd April, with the gap between the rate on German 10 year bonds and US 10 year Treasuries exploding by around 50 basis points over the same period.

We think that the rally in the euro and the general market mayhem has almost certainly sealed the deal for another interest rate cut from the ECB at Thursday’s meeting, which is effectively fully priced in by swaps.

The key focus for markets will be the bank’s remarks on the path ahead for policy, particularly the bank’s communications on how the tariffs may impact the economy in the common bloc.

While the tariffs make further cuts highly likely, the Governing Council may refrain from committing to an explicit rate path given the acute levels of uncertainty.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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