ECB set to cut rates again

The euro has slipped to around $1.0850 and £0.8360 against the dollar and sterling respectively ahead of today’s ECB meeting, which is widely expected to deliver another 25bps cut in the deposit rate (to 3.25%). The market is pricing in a series of quarter-point cuts at the following few meetings as well, which might help to limit the downside for the euro post today’s announcement. The pound remains on the back foot against the dollar following yesterday’s weaker than expected UK inflation data, trading just below $1.2980 this morning.

Following the latest inflation data, the market now fully expects the Bank of England to cut rates by 25bps next month and is pricing in about a 75% chance of anther quarter-point reduction in December. This contributed to UK government bonds outperforming yesterday, with 2-and 10-year yields falling by 10-12bps. Equivalent German yields fell by 3-4bps, while US yields were flat to very marginally lower on the day.

Equity markets had a mixed session yesterday. European stocks closed lower for a second consecutive day, ending down around 0.8%, but US indices finished in positively territory with the S&P 500 adding around half a percent (albeit remaining shy of Monday’s record high).

The main focus today is obviously the ECB meeting. While a 25bps cut looks a done deal,  another move as soon as this month didn’t appear likely following September’s meeting when the ECB indicated it would continue with its cautious and gradual approach to lowering  rates. However, it seems increasing concerns about the deteriorating Euro area growth outlook has prompted the central bank to avoid delaying a further dialing back of its restrictive monetary policy stance.

There’s plenty of economic data due today, including retail sales, industrial production and weekly jobless claims in the US and September CPI inflation (final reading) in the Euro area.