ECB primes market for September interest rate cut

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The European Central bank gave its clearest indication yet that lower interest rates may be on the way in the Euro Area on Tuesday, with President Mario Draghi hinting that rates could be lowered as soon as the bank’s next policy meeting in September.

olicymakers in the Eurozone held interest rates unchanged following its July meeting. President of the ECB Mario Draghi struck a dovish tone during the bank’s press conference, voicing heightened concerns over the outlook for the Euro Area economy. He stated that significant stimulus was still necessary, while noting that recent data pointed to ‘somewhat weaker growth’ in the second and third quarters. Draghi also claimed that the chances of a rebound in activity in H2 were becoming less likely

Regarding its future policy moves, the bank’s statement noted that ‘the Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020.’ The addition of the word ‘lower’ marks a significant change in forward guidance that suggests that the bank is ready to follow suit with the Federal Reserve in easing policy at its next meeting. Draghi also suggested that in addition to modifying interest rates, the reintroduction of its quantitative easing programme could be on the cards.

We think that the inclusion of the phrase ‘lower levels’ with regards to future interest rates paves the way for fresh stimulus at the central bank’s next meeting in September, when updated economic projection will be released. Yet, with the bar for Fed rate cuts lower than the ECB, the medium term path for EUR/USD remains higher, in our view.

Sterling rally fades on European Commission report

Most other news was largely overshadowed by the ECB announcement yesterday. A report that EC President Juncker had told new PM Boris Johnson the current withdrawal agreement was the only Brexit agreement available led a modest sell-off in the Pound yesterday afternoon. This largely solidifies market concerns that forcing a Brexit deal through parliament will be one of the biggest challenges facing an incoming British Prime Minister in recent memory.

Attention in the markets now shifts to this afternoon US growth data. Markets are eyeing second quarter expansion of around 1.8% annualised. While the market is fully pricing in an interest rate cut from the Federal Reserve at its meeting next week, a disappointing GDP number this afternoon could ramp up bets for an even more aggressive pace of easing during the remainder of the year.