Created
: 2025.06.05
2025.06.05 16:01
The European Central Bank (ECB) is widely expected to reduce key interest rates for the seventh time in a row. The decision will be announced on Thursday at 12:15 GMT.
The interest rate decision will be accompanied by the quarterly staff projections about inflation and growth, while ECB President Christine Lagarde's press conference will follow at 12:45 GMT.
The Euro (EUR) could experience intense volatility on the ECB announcements against the US Dollar (USD).
The ECB is expected to lower the benchmark rate on the deposit facility by another 25 basis points (bps) to 2% from 2.25%, following the conclusion of the June monetary policy meeting.
The main reason behind the rate cut is the decline in inflation towards the ECB's 2% target. Data released by Eurostat showed that the Harmonized Index of Consumer Prices (HICP) in the Eurozone rose 1.9% year-over-year (YoY) in May, after increasing by 2.2% in April. Additionally, the annual core HICP inflation dipped to 2.3% from 2.7% in the same period.
Still, a bunch of ECB policymakers considered hawks have been vocal last month about their preference for a rate cut pause, given the heightened uncertainty on the economic outlook amid the US-EU trade war.
ECB policymaker Robert Holzmann said that "the ECB should pause further interest rate cuts until at least September." Board member Isabel Schnabel warned of "new shocks posing new challenges" even as disinflation remains on track. Meanwhile, ECB Governing Council member and Bundesbank President Joachim Nagel argued: "Given the continuing high level of uncertainty, we should therefore remain cautious in monetary policy."
On the trade front, US President Donald Trump threatened on May 23 to impose 50% tariffs on European Union (EU) goods, complaining that the 27-member bloc had been "very difficult to deal with" on trade and that negotiations were "going nowhere." Those tariffs would have kicked in starting June 1.
A couple of days later, Trump said that the United States (US) will delay the implementation of a 50% tariff on EU imports from June 1 until July 9 to buy time for negotiations.
Last Friday, US President announced the doubling down of tariffs on steel and aluminium imports to 50% from 25%. The measure, which would hit Europe hard, is supposed to take effect from June 4.
Amidst lingering uncertainty over the impact of Trump's trade policies on the old continent's economic activity and the continued progress in disinflation, the ECB policy statement, quarterly inflation and growth forecasts and President Christine Lagarde's speech will be closely scrutinized for fresh hints on the central bank's next interest rate move.
Previewing the ECB's April meeting, TD Securities analysts said: "We expect a 25 bps cut, with markets and consensus converging on the same. Projections are likely to be lowered for growth and inflation due to global trade policy developments since March."
"However, citing resilience in the economy and convergence on the inflation target, this cut is likely to be paired with a hawkish tilt in language, suggesting a pause in July," analysts noted.
EUR/USD has maintained its bullish momentum so far this year, courtesy of the US Dollar's underperformance (USD) on growing fears over an economic downturn, likely driven by Trump's tariff war.
Heading into the ECB showdown, the main currency pair is losing traction due to the renewed buying interest seen around the USD.
Odds of more rate cuts in the future would ramp up in case President Lagarde or the quarterly forecasts suggest that disinflation remains on track despite the tariff-related uncertainty. In this scenario, EUR/USD could extend its correction from six-week highs. If Lagarde voices concerns about the economic outlook, it could reaffirm this dovish view.
Conversely, the Euro could resume its uptrend against the USD if the ECB indicates potential upside risks to inflation and Lagarde suggests prudence ahead in order to assess the tariff impact, fanning expectations of a pause in its easing cycle.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD:
"EUR/USD holds well above all major daily Simple Moving Averages (SMA) while the Relative Strength Index (RSI) indicator stays firm near 56, suggesting that upside risks remain intact for the pair."
"On the upside, the immediate resistance aligns at the six-week high of 1.1456, above which the 1.1500 round level will be tested. The April 21 high of 1.1574 will be next on buyers' radars. Alternatively, healthy supports could be spotted at the 21-day SMA of 1.1285, followed by the 50-day SMA at 1.1220 and the 1.1150 psychological barrier," Dhwani added.
One of the European Central Bank's three key interest rates, the rate on the deposit facility, is the rate at which banks earn interest when they deposit funds with the ECB. It is announced by the European Central Bank at each of its eight scheduled annual meetings.
Read more.Next release: Thu Jun 05, 2025 12:15
Frequency: Irregular
Consensus: 2%
Previous: 2.25%
Source: European Central Bank
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called 'doves'. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called 'hawks' and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Created
: 2025.06.05
Last updated
: 2025.06.05
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