The ECB will meet this Thursday (September 12) and is expected to cut interest rates by 25 basis points. The attention of traders is focused on the prospects for the next few months. The money market is currently betting that Europe will relax its policy by about 60 basis points this year. The September data may be important for the October session.

The focus has also turned to economic growth

Inflation is no longer the sole focus, as economic growth has become equally important, although the central bank still prioritizes stabilizing inflation at around 2.0%.

Recent news is that several disappointing US business and employment data have sparked speculation that the world's largest economy may be on the verge of recession and could drag down the rest of the world as US interest rates remain limited.

The Eurozone economy surpassed analysts' expectations in the second quarter, showing continued growth since the third quarter of 2023, but the pace was still moderate, with a quarterly rate of 0.3% and an annual rate of 0.6%, lower than the ECB's forecast of 0.8% in 2024.

Of course, if you take a look at EU member states, you'll find that the gap is widening, and the GDP data for tourism-dominated economies such as France and Italy is better than that of industrial-dominated Germany. The latest S&P Global Business PMI report shows that the French Olympics and the growth of tourism in Spain and Italy are likely to support the GDP data for the third quarter. However, since Germany's growth engine in artificial intelligence and other technologies lags behind the US and China, and the existence of geopolitical risks, it is doubtful whether the EU can attract notable investments in the next few years.

(Eurozone manufacturing PMI struggles, dark blue)

The Eurozone labor market is not a problem

As for the labor market, the unemployment rate has remained stable near a historic low of 6.4%, but near zero growth in household consumption and falling savings rates reflect cautious spending intentions. Despite uneven wage dynamics among member countries and Germany demanding more wage increases, the average level of the latest round of intra-EU negotiations was low, falling from 4.7% in the first quarter to 3.6% in the second quarter, which mitigated the risk of a spiraling wage and price.

Cutting interest rates by 25 basis points for the second time is a foregone conclusion. What's next?

Therefore, lowering the deposit facility interest rate by 25 basis points to 3.50% for the second time this week is likely not met with strong opposition. Analysts believe this is a foregone conclusion, especially after ECB Executive Committee member Kazaks (Kazaks) acknowledged that the sideways trend in inflation was consistent with further interest rate cuts. A few days later, the overall CPI index broke through the range. The annual rate was 2.2%, a three-year low, slightly higher than the ECB's 2.0% target, while the core indicators also slowed significantly to 2.8% per annum.

(Eurozone inflation slightly above the 2% target)

Similar to the Federal Reserve, we have to ask if the Eurozone is likely to cut interest rates by 50 basis points this year. The ECB plans to update its inflation and GDP forecasts at the same time as announcing interest rate decisions, so it may give fresh hints about its next policy steps. However, as economic data for September come out, the October conference may be seen as a better time to guide investors.

Meanwhile, the futures market expects to cut interest rates by 25 basis points for the third time later this year, but they are unsure whether to cut interest rates in October or December. If there is no progress in October, there is also uncertainty as to whether the possible interest rate cut in December will be 50 basis points. Overall, investors expect interest rates to reach 2.5% by March 2025, which means the Federal Reserve will continue to relax its policy or cut the benchmark interest rate by 50 basis points and take a break from the next meeting.

(Eurozone benchmark interest rate is expected to fall to 2.5% by March 2025)

Market reaction

Currently, policymakers are likely to avoid any strong dovish remarks, and in light of rising service prices, they may prefer gradual policy monitoring. If this turns out to be the case, investors may turn this into a hawkish signal to help EURUSD recover to its 20-day simple moving average (SMA) of 1.1084 and then to the important resistance level of 1.1100.

(EUR/USD daily chart source: eHuitong)

From a technical point of view, after falling below the simple moving average on the 20th today, the market's attention turned to the 1.0990 area, while the 1.0915-1.0940 area is likely to stop a sharper decline. However, for the bearers to reach the latter, the central bank must discuss the possibility of cutting interest rates by 50 basis points, and even send a signal that it will continue to implement the easing policy until 2025.

At 18:13 Beijing time, EUR/USD reported 1.1037, an increase of 0.03%.