When the ECB cuts rates what happens to EUR next?

A cut may be a done deal but how will the Euro react?

Forward guidance in the form of countless ECB governing council members telling us countless times that a cut in June is coming should have sucked all the volatility out of Thursday’s ECB meeting. However, the market is always looking forward and so what comes next is more important than what happens now.

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Central bank rate cut race

The last Central Bank review of 2023

Now we’re over the December central bank hump, let’s look at what happened and what changed

This is a follow up to my post a couple of weeks ago: The final furlong of 2023, where I discussed what could happen with central banks through the end of 2023 and into 2024.

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Central banks

The final furlong of 2023

Here’s a trading review on where central banks stand and where they might be going in the last meetings of 2023

In a post at the beginning of the year, one of my timelines was that we would be well into playing the rate cut game by the end of the year. Well, here we are and with one last round of central bank meetings in 2023, the market is eager to see what they set up for 2024.

Let’s start with the Fed

The market is well into playing the guessing game for when hikes happen and how much rates will be cut. As usual, there’s a fairly large spread but the main consensus is that rates start to get cut from around the middle of 2024.

We have one more CPI report (12th Dec) before the FOMC (13th) and that will likely be a big mover for last minute rate expectations.

I believe that the Fed will use this meeting just to take them into 2024 with as little drama as possible. That would mean keeping the “job’s not done” stance on inflation, and saying that rates are still “restrictive” but not “sufficiently restrictive”. There is no need to start talking cuts, nor allow the market (which is pretty much always dovish) to get extremely dovish.

In fact, as I type this, Powell’s been out to give that exact message but the makret has given him the middle finger with USd selling and yields dropping.

There is a risk that Powell states that rates are “sufficiently restrictive”, and that might be what’s decided by the CPI report. A 2 handle on headline CPI would most certainly rule out a last hike and then that could give them the green light to use “sufficiently restrictive”. However, if that does happen, expect an uber strong message about “higher for longer” and making it clear cuts are not on the table yet (not that that might mean anything given the price action right after Powell).

For USD. There’s no outcome where the Fed are uber hawkish so any such rally is likely to be sold into. If Powell doesn’t deliver a ‘no change to view’ meeting, USD and yields will likely get smoked further than they are today.


Given the latest rounds of inflation data, we can also further rule out any more expectations for hikes. The ECB is comfortable where rates are and markets are playing the same “when will they cut?” game. The vast difference in Europe is that the fundamentals are looking far less rosy than currently in the US, and that’s a pressure that’s going to weigh on the ECB. We’ve also just had an inflation print of 2.4%, which puts them closer to their target than any of the other major central banks. Even if the core number remains higher, the headline is the number that guides them in their mandate.

It might be a tougher sell for Lagarde to keep the “higher for longer” message valid in her presser. I also think we may be approaching a situation where the market will start to worry whether they can ‘soft land’ inflation to target, or if it’s going to run straight through and keep going. That might not be something anyone will worry about for this meeting but it might become valid early in 2024, depending on the next inflation data.

We do potentially have the PEPP reinvestment discussion to think about, after recent comments from ECB sources but like the Fed and BOE, QT isn’t seen as a big hawkish monetary policy stick. We may get a move up in EUR if they do a bit more than stopping reinvestment but I doubt that will be a lasting move.

Overall, Lagarde will also not want to let the market get too dovish and therefore prematurely ease financial conditions.

For EUR. Today as I write this the euro is under the cosh for the very rate cut expectations I mentioned above. The Fed had its turn and now it’s the ECB’s turn. If anything, that means Lagarde might have to sell the ‘higher for longer’ message even more strongly at the ECB meeting. Like the dollar, any euro rise on strong non-dovish language might become a selling opportunity for some but we might also just find ourselves developing a new range to work into 2024.  Same as the Fed, any weakness in the message from Lagarde and EUR gets hit hard.


In this last week, I’ve slowly come around to the conclusion that the BOE might be becoming the most hawkish bank of the majors. Despite Bailey & Co being very bearish on the UK, they’re still troubled by sticky inflation and particularly wages and services inflation, which happens to be only the biggest sector in the UK economy…

While the Eurozone PMI’s wove a tale of accelerating price drops, the UK PMI told us that while input prices might still be falling, output prices were still rising. That’s the sticky effect right there.

I’ve had a view that the UK might be at risk of its economy tipping over faster than the others due to the height speed of hikes, and while it’s not out of the woods, it seems to be doing a touch better than Europe. It can all change in a heartbeat though but for now, the pound is down the charts for being spanked on cut expectations.

For the 14th Dec meeting, once again, hike expectations are low but there might be more of a hawkish tilt on the sticky inflation, which will then be offset by that dour view of the economy from Bailey. Only someone like him could manage a central bank meeting where the outcome might be both hawkish and bearish.

For GBP. Always the wild card currency but if a non-dovish/hawkish monetary policy message balances out a weak economic outlook message, GBP will probably do nothing and be thankful it’s not in the limelight like the others may be. GBPUSD and EURGBP will be the key movers for the trio of banks and the Fed and ECB will likely drive the moves more than the BOE will, so the strength or weakness of USD or EUR will define those pairs, more than the BOE will for GBP.

For the BOC and BOJ

These should pass by without incident. The BOC has been calmed by the pullback in inflation, after panicking over a two month hot streak. 

The BOJ will not be ruffling any feathers into the year-end. Their stall is set out about watching the wage negotiations in spring 2024.

However, one big question might raise its ugly head, and that’s what happens if inflation starts to drop going into the spring? The BOJ will be in a position to potentially start tightening on the higher wages, even while inflation might be down, or below target. Now they’ve made wages a big thing, they’ve done the unusual thing of painting themselves into a corner. If wages aren’t enough to tighten policy on, or if inflation is too low when those wages deals come through, and that keeps them easing, I dread to think where USDJPY goes on the upside. They might be getting into a bit of a hope trade that all the ducks align for them to tighten, and that happening is the only thing that could see JPY strengthen significantly.

The Central bank ABC – Easy as 123?

Here’s three scenarios for each of the three central bank decisions

A – Fed

  1. The last hike. A clear message that they are on pause (with obvious caveats that they would be prepared to do more if the situation arose). Victory laps on inflation coming down. Worried about the economy, worried about too tight financial conditions. Low probability – Very bearish USD & yields.
  2. Hike and keeping another firmly on the table. Data dependency for the next hike. Maintaining the higher for longer message. Warnings about a ‘job still to do’ on inflation. Financial conditions tightening but not yet to problem levels. Economy still doing well but monitoring any weakness. Jobs still strong. High probability – USD & yield positive but may not be lasting as the market will still anticipate we’re at the end of the cycle.
  3. Hawking til the end. Hike now, definite hike later. May pause after that but with an eye for further hikes. Economy still strong. Inflation is still a big problem, worried about it returning. Low/medium probability – Very bullish USD & yields.



  1. Another last hike. The doves finally draw the line in the sand and it’s time for the hawks to concede some ground. Tighter financial conditions, falling inflation/PPI data, worsening economy (especially Germany). Recession fears. Low probability – Uber bearish EUR.
  2. A hike and September very much in play (data dependency again). Core inflation still sticky (went up last month) but other parts of the economy are notably slowing. Financial conditions are tightening further. Recession still not base case but risk to the outlook is growing. To maintain higher for longer until the job is done on inflation. Talk on increasing QT. High probability  – Moderately bullish EUR strength (again may be time limited). There’s a bit more dovish expectation to undo here than for the Fed.
  3. July and Sep are going to see rates rise. Door not closed for hikes after that. Not concerned with financial conditions. Data is troubling but will not stop them hiking unless it gets much worse. No recession likely. QT increase announced and spun almost like a rate hike replacement to keep tightening policy stance. Medium probability – Bullish EUR.


  1. No action, no tweaks, no forecast changes, no language changes, no hints – Low probability – Very bearish JPY.
  2. No action but higher inflation forecasts (at least above target for FY2023, small chance above target FY2024). Language change to reflect change in inflation assumption to more hawkish. Hints for a tweak later down the line  High probability  – Bullish JPY
  3. Forecasts up, a YCC tweak, language hawkish but cautious – Low/medium probability –  This would bring a big bout of strength for JPY but also give the BOJ some breathing space. YCC isn’t interest rates so it’s not huge tightening if they move the band. We may see too much of a market overreaction on this outcome.

Obviously there are many different outcomes for these three bank meetings but I hope this give you a broad set of outcomes with which to base your trading plans on.

train pulling into station

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Faster Slower Higher Lower Longer Shorter

The Forex Analytix February 2023 Central bank preview

The Fed

What’s expected?

  • 25bp hike.
  • Re-emphasise the high-for-long policy on rates.
  • Pushing the soft landing narrative.
  • A good start on inflation but more to do.

What are the surprises?

  • 50bp hike, or even unchanged.
  • Any indication rates may not get to the dot levels, i.e a pause is coming sooner than. expected.
  • Worries about wages and second wind upside effects for inflation.
  • Changes to QT (Bigger = Hawkish. Smaller = Less hawkish).

What assets should we watch?

  • US yields – 10yr, 2yr & 1yr.
  • S&P

Obviously USD all over but USDJPY can often be a cleaner trade, particularly as we have the ECB the next day. EURUSD might not move too far out of sync on the Fed while it has one eye on the ECB. Same for GBPUSD and the BOE. 

Let yields be thy guide for what USDJPY might do.  If yields move, do they hold? If not, don’t expect USD to stay the course either.

Monitor what stocks (S&P) does over the event. I’m still looking to see if the risk definition has changed. Do they go up if Powell pushes the soft landing narrative and keeps a hawkish slant? Do they keep to the old ways and rise if Powell is less hawkish on policy or less bullish on the economy?



What’s expected?

  • 50bp hike.
  • Promise of more to come (2 more 50’s).
  • Reiterate they will continue until inflation is under control.
  • Also a good start on inflation but more to do.
  • Resilience in the economy.
  • QT to start in March.

What are the surprises?

  • Lagarde rolling back some on the 50bp promise.
  • Larger division among the ECB members for another two 50 bp hikes (maybe this comes from the usual sources pieces after).
  • Any changes to the upcoming QT program (earlier/later start, bigger than expected).

What assets should we watch?


I don’t feel that this event is going to bring any big surprises so reaction may be limited. However, there’s a risk here that EUR holds something back after the Fed just to get over the ECB hump, so be careful not to get sucked into a false sense of security until the presser is over. If, for example, USD is screaming higher but EURUSD looks like it’s holding back, it may play catch up when Lagarde is done talking. Then be on watch for the sources drops.


The BOE (with MPR)

What’s expected?

  • 50bp hike and confirmation of a drop to 25bp going forward, and a possible pause time.
  • Reaffirm the need to be vigilant on inflation being more persistent.
  • Change in forecasts

What are the surprises?

  • 25bp hike.
  • The votes – Last time 7 voted for hikes (6x50bp, 1x75bp), 2 voted for to keep rates unchanged. Likely we see the same hike/unch numbers but if more shift to the unchanged vote, that will be far less hawkish.
  • Statement/minutes show that rate hikes may not stop as quickly as expected.
  • Some pushback against the market’s year-end pricing of a rate cut.
  • MPR forecasts. Will the BOE be more bullish or bearish on the economy?

What assets should we watch?


Having the BOE and ECB so close together could present some interesting opportunities. For one, the ECB is the bigger bank so by size it favours EUR over GBP on big euro news. Secondly, if the BOE says or does something that kicks this out of sync with what the ECB are expected to do, that’s when it will get my keen interest. We’ve got some good range edges to play here. 


Generally, while there is room for some shocks, I don’t see anything that might be game changing. The Fed’s not going to say rates are going to 8%, the ECB are not going to announce rate cuts from next month. In market expectation terms, we’re pushing food around the plate. To that end, I’m going to be looking at trading the range edges over all these CB’s, if seen. But, don’t also forget the NFP on Friday, as that could turn everything from these CB meetings on its head (in USD terms). Get a hawkish Fed followed by a -300k NFP and that plate of food might be smashed on the floor.

Our ‘Wizard of Waves’, Grega has some excellent analysis on USD into the FOMC and Stelios has a great overview of central banks in the early part of this year.

crystal ball

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Central Banks & Markets Update Q1 2023 Markets in 2022 were mainly characterised by central bank tightening their monetary policy, but in 2023 it looks like these hiking cycles may be coming to an end.