Synopsis:
Goldman Sachs forecasts that the European Central Bank (ECB) will implement rate cuts at consecutive meetings for the first time since 2011. While softer inflation data and weaker economic activity support additional easing, the bank expects the ECB to maintain a cautious approach, which may limit immediate downside risks for the euro against the dollar.
Key Points:
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Sequential Rate Cuts Expected:
- Economists anticipate the ECB will deliver rate cuts at back-to-back meetings, responding to weaker inflation and activity data.
- This marks the first occurrence of sequential cuts since 2011.
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Gradual Acknowledgment by the ECB:
- The ECB has shifted from initially stating that "key information" wouldn't be available until December to gradually acknowledging the need for another rate cut.
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Caution on Near-Term EUR/USD Downside:
- Despite the euro's weak momentum, Goldman Sachs does not expect the ECB to adopt more explicit forward guidance at this time.
- A meeting-by-meeting cutting cycle sets a high bar for currency depreciation, as it suggests policymakers need convincing to cut rates each time.
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Euro's Relative Resilience:
- The cautious approach helps explain the euro's relative strength this year despite downbeat economic data.
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Potential for Future EUR/USD Downside:
- A proactive stance by the ECB that significantly diverges from the Federal Reserve could lead to euro depreciation.
- Such a shift is unlikely at the upcoming meeting without a significant change in the relative economic outlook.
Conclusion:
Goldman Sachs expects the ECB to proceed with rate cuts in a cautious, sequential manner without providing explicit forward guidance. This approach may limit immediate downside risks for the euro, maintaining its relative resilience despite weaker economic indicators. Significant EUR/USD depreciation is deemed unlikely in the near term unless the ECB adopts a more aggressive policy stance that diverges from the Fed.