ECB Lowers Interest Rates Again – Is Disinflation on Track?

Last Thursday, the European Central Bank (ECB) announced another 25 basis point rate cut, bringing the deposit facility (the rate through which the ECB Governing Council steers monetary policy) down to 3.25%. This follows data showing that inflation is decreasing faster than expected and weaker growth in countries like Germany.

As a result, disinflation in the eurozone could be "well on track," according to ECB President Christine Lagarde’s statement at the press conference following the decision. However, she explained that inflation is expected to rise slightly for the remainder of the year before reaching the 2% target sometime in 2025, though this is likely to happen sooner than previously predicted in the ECB's September meeting.

In an interview with France Inter Radio, François Villeroy de Galhau, an ECB board member and head of the French central bank, mentioned that he believes 2% inflation could be reached as early as next year. However, he emphasised that decisions will be made based on incoming data.

ECB's December Forecasts and Outlook

Attention is now shifting to the ECB's next interest rate decision, scheduled for December 12th. Markets are already pricing in another 25 basis point cut.

Although this expectation is considered likely, the path forward remains somewhat uncertain. In its risk assessment, the ECB expressed that lower confidence, geopolitical risks, and a weaker global economy could slow the recovery of consumption and investment in the eurozone. On the other hand, growth could be higher if the global economy expands faster than anticipated. Inflation could rise due to higher wages, profits, or geopolitical tensions but may decline if uncertainty curbs consumption and investments or if monetary policy dampens demand more than expected.

EUR/USD Forecast

While markets await upcoming statements from the ECB, the EUR/USD has shown signs of both recovery and new lows over the past week. On Tuesday, October 22nd, the pair broke out of its recent downward trend and held above 1.0800, driven by a broad decline in the US dollar. However, yesterday, the pair hit a new low of 1.0760 as the US dollar remained strong, pushing the DXY index (which tracks the value of the US dollar against a basket of foreign currencies) to its highest level since July.

Today, the pair has again shown signs of recovery, but expectations of rate cuts and rising US Treasury yields may limit the upside going forward.

As neither the ECB nor the US Federal Reserve (Fed) has provided any real, clear indications of future actions, EUR/USD will largely be influenced by macroeconomic trends. The US economy is currently outperforming the eurozone, which will likely continue to benefit the US dollar.