ECB is expected to commence its monetary policy loosening cycle today, with market anticipating a 25 basis point reduction in deposit rate to 3.75% and an adjustment of main refinancing rate to 4.25% correspondingly. Key focus areas will be ECB’s communication during the press conference and updates in the economic projections, which could provide crucial insights into the central bank’s policy strategy for the remainder of the year.
Economists are divided on the future pace of easing, with some forecasting two additional rate cuts in September and December. However, they acknowledge that the likelihood leans overwhelmingly towards fewer rate cuts rather than more, particularly if core inflation remains elevated and economic recovery picks up speed at the beginning of Q3. Current market pricing reflects this uncertainty, with only 60% probability assigned to a rate cut in September.
A critical aspect to monitor will be any adjustments in the inflation forecasts, especially any upward revisions. A significant increase in inflation projections could diminish the likelihood of a rate cut in September.
EUR/CHF is now sitting at a juncture, pressing 38.2% retracement of 0.9252 to 0.9928 at 0.9670. Strong bounce from the current level, followed by sustained trading above 55 D EMA, will maintain near term bullishness. That is, while corrective pattern from 0.9928 could still extend further, rise from 0.9252 is in favor to resume at a later stage.
However, sustained break of 0.9670 will raise the chance of bearish reversal, and bring deeper decline to 0.9563 support next.
