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Apr 10 - 10:55 AM

BofA: What We Expect From April ECB and EUR/USD Reaction

By eFXdata  —  Apr 10 - 09:30 AM

Synopsis:

BofA forecasts no significant policy changes at the upcoming ECB meeting, suggesting the central bank is edging closer to initiating rate cuts, albeit with a cautious, data-dependent approach. Despite rising confidence in the trajectory towards rate reductions, the exact pace and depth remain under wraps, adhering to a "meeting-by-meeting" strategy. The meeting is not expected to substantially influence the EUR/USD exchange rate, with any impact anticipated to be fleeting.

Key Points:

  • Rate Cut Trajectory: BofA maintains its forecast for ECB rate cuts in June, September, and December 2024, aiming for a target rate of 2% by July 2025.
  • Transient Market Impact: The ECB’s meeting is unlikely to leave a lasting mark on EUR, given the central bank's reluctance to commit to a specific cutting path and its continued emphasis on being data-driven.
  • Caution Amid Progress: While acknowledging advancements in controlling inflation and wages, the ECB remains wary of persistent service sector inflation and recent upticks in oil prices.
  • EUR/USD Outlook: BofA predicts a gradual appreciation of EUR/USD to 1.15 by year-end, emphasizing the Fed's influence over EUR/USD more than the ECB's. Relative monetary policies are expected to favor EUR against CHF, NZD, and CAD but not against GBP, with potential for weakening against AUD and the Scandinavian currencies.

Conclusion:

The upcoming ECB meeting is poised to reflect a growing but cautious optimism towards rate cuts, with its outcomes expected to have minimal long-term effects on EUR/USD dynamics. The broader trajectory for EUR/USD will likely hinge more on Fed actions than on ECB decisions. Despite temporary impacts, underlying shifts in economic data and global monetary policies could nudge EUR/USD upwards, highlighting the complex interplay between central bank strategies and currency market reactions.

Source:
BofA Global Research

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