ING Global Economics Team
ING Economic and Financial Analysis
The European Central Bank should cut but we still see a tail risk that the Governing Council decides to hold the deposit rate at 3.5%. Markets are already fully pricing in four consecutive 25bp cuts, which prevents the front end of the curve from going much lower based on current economic data. We have a bias towards a flatter EUR curve going into the meeting.
ECB cut most likely, but sharp market positioning prevents the front end going lower
We think the ECB will cut by 25bp, and so do markets, but holding the deposit rate at 3.5% is still possible in our view. Not cutting would be a big surprise to rates given the implied probability of swaps is north of 90% and has been there for two weeks. After this meeting, markets price in consecutive cuts of 25bp for the next four to come, and thus a disappointment now would challenge the entire trajectory going forward.
Also if the ECB cuts as expected, we see a considerable chance that market expectations won’t be met in terms of communication. The ECB will likely want to keep flexibility about a December cut and will push back against the idea that this is the start of consecutive cuts, as is currently priced in. On the other hand, ECB President Christine Lagarde may place more emphasis on mounting growth concerns, which could be caught as a dovish tone by markets. Having said that, we deem it unlikely markets will move to pricing in a probability for 50bp cuts for the time being and thus the front-end of the curve should be supported from below.
A pushback against current pricing (or even a decision to hold rates) could see some flattening of the EUR swap curve. Not cutting would risk a broader risk-off move as worries about a policy error would rise considerably. In this case, the terminal policy rate of the ECB could actually fall back below the neutral range of 2-2.25% as recession risks get priced in more. With little scope for the front end to go lower, we go into the meeting with a bias towards a flatter curve.
Read the original analysis: Rates spark: Markets positioned for back-to-back ECB cuts
Content disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more here: https://think.ing.com/content-disclaimer/
Recommended Content
Editors’ Picks
EUR/USD stays cautious near 1.0850, as ECB rate decision looms
EUR/USD trades with caution near 1.0850 in the European session on Thursday. The pair struggles, despite a steady US Dollar and a positive shift in risk sentiment, as ECB rate cut bets remain a drag on the Euro. ECB policy announcements and President Lagarde's presser eyed.
GBP/USD retakes 1.3000 ahead of US Retail Sales data
GBP/USD is grinding higher to retest 1.3000 in the European session on Thursday. The pair benefits from a recovery in risk sentiment and a pause in the US Dollar advance. All eyes now remain on the US Retail Sales data for fresh trading directives.
Gold rises toward $2,700, sets new record-high
Gold price prolongs its one-week-old uptrend for the third straight day and trades at a new record-high above $2,680. Investors await the weekly Initial Jobless Claims and September Retail Sales data releases from the US.
European Central Bank set to trim interest rates again as economic outlook worsens
The European Central Bank is expected to cut benchmark interest rates by 25 bps at the October policy meeting. ECB President Christine Lagarde’s presser will be closely scrutinized for fresh policy cues.
Another unconvincing policy briefing fails to inspire confidence
Chinese authorities are playing the long game, trying to keep investors focused on the bigger picture, multiple stimulus measures spread out over time, with a bit of subtle bid support from state-backed institutions.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.