Euro gains a little as ECB cuts again
The ECB cut rates by another 25bps yesterday taking the deposit rate to 2%. This move was fully priced in by the market so there was no great surprise. There will likely be a pause in rate cuts now, for the July meeting at least, but the market is still pricing in one further cut in the second half of the year before the ECB stands pat. The euro gained on the dollar and sterling following the decision, getting up close to $1.15 for a short time before back to under $1.1450 now and 84.3p to sterling. The GBPUSD cross did see sterling gain for a time yesterday also, breaching $1.36 briefly but back down to around $1.3550 now.
The ECB rate cut was its eighth in total since starting to cut rates in June of last year, taking a cumulative 200bps from the deposit rate down to 2%. President Lagarde said the ECB is ‘in a good position to navigate the uncertain conditions’ and said the Bank is ‘getting to the end of a monetary policy cycle’. The updated baseline forecasts for the Euro Area show shallow growth of 0.9% this year and 1.1% next year, unchanged and down 0.1 percentage points respectively from March’s forecasts. Headline inflation is seen as being a little weaker than previously thought, averaging 2.0% this year and a below target 1.6% next year (both down 0.3 percentage points from March’s projections). Lagarde said the risks to the economy were still skewed to the downside – indeed the forecasts included a downside scenario with growth of 0.5% this year and 0.7% next year. However, inflation appears to have been tamed and, while a stronger euro and lower energy costs may weigh on it next year, it’s forecast to return to target in 2027. All this means that the ECB may see their job i.e. the 2% price mandate, as being largely complete. The markets are still pricing in one further 25bps cut in rates, which many in the ECB may argue is needed due to uncertainty, downside risks and sluggish growth, but they have bought themselves some time to assess incoming data before moving again so there is only a 40% chance of a 25bps cut coming at the next meeting at the end of July moving to an 85% chance at the September meeting.
US equities saw the major indices post losses for the day. An escalating public war of words between President Trump and former acolyte Elon Musk injected more uncertainty into sentiment which saw the S&P lose 0.5% for the day and the Nasdaq lost 0.8%, with Tesla down a sharp 14%. With President Lagarde indicating the ECB is closing in on the end of its easing cycle, shorter dated European bonds yields rose with German 2-year yields up 8bps to 1.86% and longer dated yields also up but not as much, with 10-year yields up 5bps to 2.58%.
Irish GDP grew by huge 9.7% quarter-on-quarter in Q1. This was driven by a jump in exports, up 9.4% quarter-on-quarter (23% year-on-year), led by pharmaceutical exports to the US as companies sought to get ahead of potential tariffs. There was also a substantial jump in investment, largely due to the intellectual property . The surge in Q1 will likely be balanced out by weaker activity in coming quarters but, for now, GDP is up 22.2% year-on-year. Looking past the distortions in Q1, the modified measures (which remove most multinational company impacts) show the domestic economy is in good shape, with household spending up 0.6% from Q4, modified investment up 1.5% – supported by gains in construction – and modified domestic demand rising 0.8%.
Looking to the day ahead, we have retail sales in the Euro Area and non-farm payrolls and unemployment data in the US. On the speaker front, we have a number of ECB members, including President Lagarde again, and Governor Bowman from the Fed.