Synopsis:

Credit Agricole has analyzed the increasing expectations of Eurozone market rate cuts in 2024, despite the European Central Bank's (ECB) pause in rate adjustments in October and Governing Council members' opposition to the easing anticipations. The bank suggests that the market is testing the ECB's resolve against a backdrop of deteriorating economic indicators in the Eurozone. However, Credit Agricole maintains that market expectations for rate cuts next year may be premature and could, in turn, enhance the Euro's appeal as these expectations are recalibrated.

Key Points:

• Market Skepticism: Despite the ECB's steady stance and cautionary messages from its members, the market is signaling disbelief, betting on up to four rate cuts in 2024.

• Economic Data vs. Inflation Focus: While acknowledging the Eurozone's recent economic slump, Credit Agricole emphasizes the ECB's primary commitment to combating inflation, suggesting that the market may be underestimating this focus.

• Reassessment of Rate Expectations: The bank forecasts that as investors realign their rate cut forecasts with the ECB's inflation-centric stance, the Euro's relative rate appeal is likely to rise.

• EUR's Liquidity Premium: Efforts by the ECB to reduce excess liquidity may increase the Euro's liquidity premium, bolstering its value against comparatively less liquid currencies.

Conclusion:

Credit Agricole contends that the market's current stance on anticipated ECB rate cuts is based on a misjudgment of the ECB's priorities, particularly its emphasis on inflation control. The bank predicts a potential boost for the Euro as rate cut expectations are adjusted, alongside an enhanced liquidity premium from the ECB's tightening of excess liquidity. This could position the Euro favorably in the currency space in the upcoming months.