What’s priced in for the ECB ahead of today’s meeting decision?

In the earlier half of Monday, traders were still convinced of at least three rate cuts by the ECB for the remainder of this year. There was ~82 bps of rate cuts priced in with the first one to be delivered this week.

Now, the odds of a 25 bps rate cut today hasn’t changed and remains fully priced in. However, traders are now only pricing in ~63 bps of rate cuts for the year as a whole. Factoring in the rate cut today, that means traders are now only convinced of roughly one-and-a-half more worth of rate cuts by the ECB after that.

As things stand, traders are still unsure if the ECB pause after today might even extend until July. Previously, they were convinced the central bank will deliver another rate cut in June after a brief pause in April. How quickly sentiment can change, eh?

It’ll now be over to policymakers to clarify all of this in the weeks ahead, starting with Lagarde today. As for the ECB statement and forward guidance itself, I don’t see a necessity for them to change things up. This is what they have been going with and it should continue to work fine even with a pause in the month(s) ahead:

“It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.”

So, the first question now is whether we will see an extended pause in June. I’m guessing the ECB will not give any answers to that today as they still have time until April to sell their story. As for the remainder of the year, a lot will ride on economic data and the political environment still.

This article was written by Justin Low at www.forexlive.com.