The European Central Bank's meeting in March is scheduled for Thursday, during which the central bank is anticipated to reduce interest rates by 25 basis points. Market participants have mostly accounted for this expectation, so all eyes will be on ECB President Christine Lagarde's comments and the wording of the accompanying statement. This situation presents a challenge, as recent macroeconomic reports from the eurozone have raised more questions than they have answered.
For example, inflation data. The eurozone's overall CPI fell to 2.4% year-over-year in February, while most analysts had predicted a decline to 2.3%. The indicator had been rising for four consecutive months (from October to January), but this upward trend halted in February. The core consumer price index, which had remained stable at 2.7% for five months, also declined slightly to 2.6%—but still above the expected 2.5%.
The eurozone economy grew by 0.1% quarter-over-quarter in Q4 2024, defying forecasts of zero growth. In other words, inflation is decreasing but slowly while the economy is growing, albeit sluggishly.
There is no doubt in the market that the ECB will cut rates by 25 basis points. However, opinions on the future policy direction remain divided. According to economists surveyed by Bloomberg, the ECB is nearing the end of its rate-cutting cycle, partly due to internal disagreements. These differences have become increasingly public and could influence the wording of the ECB's statement—a factor that could be interpreted as supportive of the euro.
For instance, the National Bank of Belgium Governor, Pierre Wunsch, stated that his colleagues should not "blindly aim for 2.0%," meaning they should not pursue rate cuts at all costs. Bundesbank President Joachim Nagel expressed a similar stance, saying further rate cuts should be approached cautiously.
On the other hand, Executive Board member Isabel Schnabel expressed uncertainty over whether monetary policy remains restrictive. Lithuanian Central Bank Governor Gediminas Simkus argued that additional reductions should be expected throughout the year following the March rate cut. He emphasized that the ECB "can afford a more accommodative monetary policy." In February, other ECB representatives, including Boris Vujcic, Piero Cipollone, and Francois Villeroy de Galhau, voiced dovish sentiments.
According to Morgan Stanley analysts, the ECB will cut rates in March and signal further easing, potentially announcing another rate reduction in April. Interestingly, in early February, Morgan Stanley economists predicted that the ECB would adopt a wait-and-see approach in April. However, they have revised their forecast given slowing inflation and weakening economic growth.
Meanwhile, Rabobank analysts take a different view. They believe the ECB will implement a "hawkish cut"—lowering rates in March but signaling that the next move will be delayed until at least June.
In my view, the ECB's final communique will reflect the central bank's internal divisions regarding the pace of future rate cuts. The mere fact of a split within the ECB would likely support the euro and favor EUR/USD buyers.
Currently, EUR/USD is rising due to a weaker U.S. dollar, which reacted negatively to Donald Trump's aggressive rhetoric in Congress. Market participants fear that escalating tariff conflicts will also harm the U.S. economy. Stagflation risks have increased, as have dovish expectations for the Federal Reserve's next moves. Traders are almost certain that the Fed will cut rates at its June meeting.
Additional pressure on the U.S. dollar came from a disappointing ADP employment report, which showed a private sector job increase of only 77,000—the weakest result since January 2021. ADP data often correlates with Non-Farm Payrolls, so after the release, the dollar index plunged into the 104 range, nearing five-month lows.
As a result, EUR/USD surged, approaching the 1.08 mark. If the ECB takes a "moderately hawkish" stance at its March meeting, the euro will gain additional support, allowing EUR/USD buyers to test the 1.0830 resistance level (the lower boundary of the Kumo cloud, coinciding with the upper line of the Bollinger Bands indicator on the W1 timeframe). However, even if the market interprets the meeting's outcome as bearish for the euro (i.e. if the ECB maintains a dovish stance), any corrective pullbacks should be seen as an opportunity to enter long positions, given the broader weakness of the U.S. dollar.
