ECB is widely expected to cut the deposit rate by 25bps to 3.25% today, marking the first back-to-back rate reduction in 13 years. This step reflects ECB’s growing urgency to accelerate monetary easing as inflation cools faster than anticipated and persistent manufacturing struggles spill over into services and employment.

Although December had initially been considered the optimal time for the next cut, recent economic data has heightened concerns among ECB officials. Nevertheless, the December meeting remains significant, with updated economic projections that will shape the policy direction in 2025.

While the market is almost fully pricing in three further cuts through March 2025, ECB President Christine Lagarde is unlikely to offer explicit guidance today. However, the underlying message will likely suggest that another cut in December is likely unless the economic outlook improves.

Technically, EUR/USD’s fall from 1.1213 short term top is in progress. Near term outlook will stay bearish as long as 55 D EMA (now at 1.0999) holds. This decline is seen as the third leg of the corrective pattern from 1.1274 (2023 high). Next target is 61.8% retracement of 1.0447 to 1.1213 at 1.0740. Any further dovish tone from the ECB today could accelerate this downward movement.

In a joint interview with four European newspapers, ECB President Christine Lagarde dismissed the notion that last week’s quarter-point rate cut would be the start of a series of similar moves. Lagarde made it clear that “interest rates will not necessarily move downward in a straightforward manner.”

“We are not following a pre-determined path,” she explained, noting that “there could be periods where we leave interest rates unchanged.”

When asked if rates could remain unchanged for multiple meetings, Lagarde said, “It’s possible. We need to observe how labor costs evolve and ensure that earnings continue to absorb the recent increases.”

Lagarde emphasized ECB’s ongoing efforts to control inflation, stating, “We are still in tightening territory and will continue as long as necessary to bring inflation back to 2 percent.”

ECB President Christine Lagarde, speaking at a Financial Times event, warned that the recent phase of quick disinflation might be nearing its end, with the potential for near-term inflation re-acceleration. This caution comes amid the possibility that the dampening effect of high energy prices on year-on-year comparisons may soon diminish.

Lagarde emphasized the need for vigilant monitoring of energy prices, suggesting that the current headline inflation figure of 2.9% shouldn’t be taken for granted. “We should not assume that this respectable 2.9 headline number is something that should be taken for granted and for long,” she stated.

Lagarde also alerted to the likelihood of seeing “a resurgence of probably higher numbers going forwards.” She highlighted that even if energy prices stabilize, the dissipating base effect could lead to higher inflation figures in the early months of the coming year.

Despite these challenges, Lagarde reiterated her confidence in ECB’s current interest rate policy. She believes that maintaining the current rate for a sufficient duration “will make a significant contribution to bringing inflation back to our 2% target.”

However, she was quick to add a caveat, indicating that ECB’s stance might need reevaluation in the face of major unforeseen shocks: “If major shocks come up, depending on the nature of the shocks, we’ll have to revisit that.”