Synopsis:

Nomura anticipates a 25bp cut by the ECB, which is already priced into the market. The key focus will be on the ECB's statement, press conference, and updated forecasts to assess the potential for a more dovish stance and faster rate cuts.

Key Points:

• Market Expectations:

  • A 25bp rate cut is fully expected by both the market and economists.
  • The ECB’s statement and press conference will be crucial in gauging the likelihood of a faster pace of rate cuts.

• Impact on EUR:

  • Broad EUR underperformance is anticipated due to softening growth and risks of a faster pace of rate cuts.
  • September’s meeting might not significantly deviate from recent messaging, with any downward revisions in forecasts likely insufficient to alter rate cut expectations substantially.

• President Lagarde’s Comments:

  • Lagarde is expected to maintain a balance in her comments, focusing on data dependence without committing to a specific future path.
  • An October rate cut is priced at around 40%, but significant movement in this pricing would require explicit commentary on negative growth momentum and weaker wage growth.

• Trading Strategy:

  • Short EUR/JPY: Given the potential for broad EUR underperformance and the current environment, Nomura suggests considering a short position in EUR/JPY.

Conclusion:

Nomura forecasts a 25bp cut by the ECB, with the market focusing on potential dovish signals from the statement, press conference, and forecasts. A significant downward shift in EUR is not expected unless more explicit dovish commentary is provided. Trading strategies may favor shorting EUR/JPY given the anticipated broad EUR underperformance and potential global recession fears.