- The European Central Bank is expected to implement a 25 bps interest rate cut on Thursday.
- Market attention is centered on the ECB's revised economic forecasts and President Christine Lagarde’s remarks.
- The EUR/USD pair anticipates heightened volatility following the ECB policy decisions.
The European Central Bank (ECB) is set to announce its March interest rate decision on Thursday at 13:15 GMT, marking its sixth rate reduction since June 2024. Alongside this, updated staff economic projections will be released, offering insight into the central bank’s outlook.
ECB President Christine Lagarde will hold a press conference at 13:45 GMT, where she will present the monetary policy statement and address questions from the media. Investors are bracing for a significant market reaction, particularly in the Euro (EUR) against the US Dollar (USD), as they assess the implications of the ECB’s policy moves.
What to Expect from the European Central Bank’s Interest Rate Decision?
The ECB is widely expected to implement another 25 basis points (bps) rate cut, reducing the deposit facility rate from 2.75% to 2.5%. This move comes as weak economic conditions in the Eurozone continue to weigh on policymakers’ decisions. With inflation on a steady downward trajectory, the ECB has some flexibility to maintain its easing path.
Recent data from Eurostat showed that the Eurozone Harmonized Index of Consumer Prices (HICP) increased by 2.4% year-over-year (YoY) in February, following a 2.5% rise in January. This was slightly above market expectations of 2.3%. Meanwhile, core HICP, which excludes volatile food and energy prices, rose 2.6% YoY in February, in line with forecasts but lower than January’s 2.7%.
Beyond the rate decision, market participants will closely analyze the ECB’s policy statement and economic projections, particularly in light of potential trade risks. U.S. President Donald Trump has recently threatened to impose 25% tariffs on European Union (EU) imports, arguing that the bloc was designed to “screw” the U.S. These trade tensions could significantly impact inflation and economic growth in the Eurozone.
Investors are also looking for hints about the ECB’s next moves. A recent Reuters poll suggests that the central bank is expected to cut rates by another 50 bps next quarter before pausing through at least 2026. Markets have already priced in an end-December rate of 2.00%.
Despite the market consensus on further rate cuts, ECB policymakers have expressed mixed views. ECB board member and policy hawk Isabel Schnabel recently told the Financial Times that the central bank is approaching a point where rate cuts may need to slow or pause. Conversely, Fabio Panetta, head of the Italian central bank, warned that inflation risks remain tilted to the downside, signaling the need for continued easing.
Minutes from the ECB’s January meeting revealed that policymakers acknowledged the disinflationary trend but also noted emerging upside risks. Some officials advocated for a more cautious approach regarding the pace and extent of future rate cuts.
Previewing the meeting, analysts at TD Securities noted that with only five weeks since the last policy decision, significant changes are unlikely. They expect a 25 bps cut, minimal revisions to projections, and only slight adjustments to the language around policy restrictiveness. According to the analysts, more substantial shifts in ECB policy are likely to come in April or June, particularly in response to trade developments.
How Could the ECB Meeting Impact EUR/USD?
The EUR/USD pair has shown resilience ahead of the ECB meeting, rebounding from two-week lows of 1.0360. The Euro’s strength is partly attributed to Germany’s proposed debt break reforms, which have supported market sentiment.
Should the ECB maintain a cautious and flexible stance on future rate cuts, the Euro could extend its rally, with the EUR/USD pair potentially climbing toward the 1.0700 level. A more hawkish tone—such as removing references to restrictive policy—could further fuel gains.
On the other hand, if the ECB maintains its current guidance or President Lagarde signals an explicit commitment to further easing, the Euro may come under selling pressure. A dovish outlook, particularly concerns about economic weakness, could drive EUR/USD lower.
Technical Outlook for EUR/USD:
The EUR/USD rally continues, though caution is warranted as the Relative Strength Index (RSI) sits in overbought territory on the daily chart. A corrective pullback could see the pair test support at the 200-day Simple Moving Average (SMA) at 1.0723, with a break below opening the door to the 1.0600 level. The final support level for buyers sits at the 100-day SMA at 1.0507.
Conversely, if bullish momentum persists, the EUR/USD pair could aim for 1.0900, with further upside potential toward the November 2024 high of 1.0937.
