Synopsis:

BofA anticipates the ECB will implement another fully priced 25bp rate cut on Thursday, with minimal lasting impact on the EUR. The focus will remain on data-dependence and meeting-by-meeting guidance, with an emphasis on domestic price pressures.

Key Points:

• Rate Cut Expected:

  • The ECB is likely to cut the deposit rate by 25bp, aligning with market expectations.
  • No major changes in forward guidance are anticipated; the corridor will narrow.

• Forward Guidance:

  • The ECB is expected to emphasize its data-dependence and meeting-by-meeting approach.
  • Domestic price pressures and high services inflation will justify the rate cut.

• Risk and Outlook:

  • Risks are skewed towards a more dovish stance due to weakening growth outlook and internal ECB discussions on potentially faster cuts.
  • Anticipated updates include slightly weaker near-term growth, higher inflation in 2024, and an unchanged medium-term outlook.
  • Unexpected downward revisions could hint at an October rate cut.

• EUR Impact:

  • Limited sustained impact on the EUR is expected.
  • Preference for ECB trades further down the curve, with positions received on both an outright and cross-market basis.

Conclusion:

BofA expects the ECB to proceed with the anticipated rate cut, maintaining a data-dependent stance with minimal impact on the EUR. The outlook includes modest adjustments in growth and inflation forecasts, with no major EUR movement expected unless there are significant unexpected changes.