Bank of America forecasts no significant changes in the European Central Bank guidance during the upcoming meeting, but anticipates a soft indication of forthcoming rate cuts in the press conference. Despite the expectation of dovish-leaning new ECB forecasts, BofA predicts a minimal sustained impact on the Euro (EUR), as the market has already priced in almost four cuts for this year. The focus for EUR/USD movement remains on US data, the Federal Reserve's actions, and overall risk sentiment, with BofA maintaining its forecast of EUR/USD at 1.15 by the end of 2024.
Key Points:
ECB Guidance and Forecasts: BofA expects the ECB to maintain unchanged guidance but to hint at impending rate cuts, with forecasts possibly indicating a 2.0% core inflation rate by late 2026. However, consensus for an April rate cut seems unlikely given current market conditions.
Market Pricing vs. Expectations: The market's anticipation of almost four rate cuts this year is slightly more aggressive than BofA's economists' expectation of three to four cuts. The potential dovish signal about an April cut, currently priced in with 6 basis points of cuts, may pose a slight bearish risk for the EUR.
Impact on EUR/USD: The influence of the ECB meeting on EUR/USD is expected to be minimal, as factors such as US economic data, Fed policy decisions, and general risk sentiment are likely to have a more significant effect on the currency pair. BofA remains consistent with its forecast of EUR/USD reaching 1.15 by the end of 2024, although a short-term projection puts it at 1.07 by the end of Q1.
Cross Currency Impact: The ECB's influence is anticipated to be more pronounced in currency crosses, aligning with trends observed this year.
Conclusion:
BofA suggests that the upcoming ECB meeting is unlikely to have a lasting impact on the EUR, attributing more significance to US economic indicators and Federal Reserve policies for future EUR/USD movements. While the ECB may lean dovish in its forecasts and soft guidance, the already priced-in market expectations for rate cuts diminish the potential for surprise. As such, BofA advises focusing on broader economic and policy developments for insights into EUR/USD trajectory, particularly in the context of cross-currency impacts.
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