TD Securities economists discuss the upcoming European Central Bank (ECB) Interest Rate Decision and its potential impact on the EUR/USD pair.
Most Likely Scenario (65%)
In this scenario, the ECB is expected to maintain its current interest rates without significantly changing its press statement. Economic forecasts are anticipated to remain essentially unchanged, with minor downward revisions to inflation projections for 2024. ECB President Lagarde acknowledges promising inflation developments, noting that while wage growth remains steady, there are early indications of a decline. However, Lagarde remains ambiguous about the timing of the first rate cut, aligning with expectations for reductions in the second quarter. This scenario could lead to a modest increase of 0.15% in EUR/USD.
Hawkish Outlook (20%)
A more hawkish stance is possible if Lagarde highlights the recent decline in inflation but warns against complacency, citing robust February data. She emphasizes the importance of wage growth and suggests that first-quarter wage data, released after the April meeting, will be crucial in determining the timing of policy easing. Although Lagarde does not directly oppose an April rate cut, she indicates that such cuts are not imminent. This scenario could result in a more significant increase of 0.70% in EUR/USD.
Dovish Scenario (15%)
Alternatively, a dovish outcome may occur if the ECB maintains its current policy stance and makes downward revisions to economic forecasts, particularly for inflation in 2024 and 2025. Lagarde emphasizes the importance of wage growth but notes its early signs of cooling. She reiterates that inflation remains the ECB’s primary target and avoids specifying when the first rate cut may occur but hints that April is possible. This scenario could lead to a decrease of 0.60% in EUR/USD.