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.

Perhaps the only element we have to trade will be when the ECB next expect to cut. A July cut has slowly drifted out of the frame in favour of the ECB taking a usual stance of changing policy at forecast update meetings but it remains a risk nonetheless.  That risk will be decided by the updated staff projections to be delivered tomorrow. Expectations are that there’s to be little change to those, which obviously makes the bigger price risk lean towards if they are changed significantly.

With the QT picture clear now too, there’s little risk to come from that area, not that any news there would be significant for the Euro but we do still have a potential matter to be resolved at some point, and that’s a prior story of the ECB maybe looking to bring all their interest rates into line. It’s worth remembering that they have three interest rates (Main refinancing rate – 4.50%. Deposit rate – 4.00%. Marginal Lending facility 4.75%). We’ve not heard anything concrete about it yet so we don’t know how the market will react to it, if it reacts at all but it’s something that might be on the ECB agenda at some point.

What’s going to happen with EUR?

We’re sitting close to some key levels in a few Euro pairs but I want to look at two of the main ones.

EURUSD has been nudging the 1.09 level coming into this meeting and a proper break could mean we see a decent move higher, at least to 1.10. I see no reason why the ECB should deliver anything that sends EUR lower. A cut won’t be a shock, while not cutting will be, and then 1.10 might be the least we see. With the market also ready to hit USD on any minor data misshap, the path of least resistance looks higher for now. The market might need to get over the press conference speedhump before really going for a wander, so don’t get sucked into thinking that if it’s not rising over the meeting, it means it’s going down.

Technically, we’re in a 16/17th month sideways move, and bar the odd blip, the wide range has been 1.05-1.10. Shorter-term, we’re in a very shallow downtrend since the late 2023 high. We’re also in a slightly longer-term wedge, which is aiding this consolidation phase.

EURUSD daily chart

 

On a closer look, a break of 1.0900 needs to clear 1.0910/15 and then faces further levels int he 1.0940/60 area before it can think about 1.10. On the otherside, we’re still not ready to resolve the wide pivot zone 1.0830/70.  If the ECB is a bit more dovish than expected, the 1.0800/1.0790 level will be in the frame.  Then it’s 1.0760, 20/25 and 1.0700.

EURUSD 4 Hour chart

 

The other pair I’m looking at is EURGBP as I trade this often and it’s rare I’m not sitting in a position on either side. I’ve been buying off the 0.85 level since last year and have longs on the books right now. I’m not keen that we’re sitting so close to the level going into the ECB as it means we might get a bit volitility leading to traders having a go at clearing out the stops. I’m looking to reduce some of my position on any rally to 0.8530’s pre-ECB but I’m also thinking about moving my stops well south of 0.85, just to try and keep out of the way of any shenanigans over the announcement.

This 0.8500 is a real humdinger of a level, hence why I’ve liked trading off it but if it does break properly, we’re likely to see a fairly swift move to 0.84, and maybe into the 0.83’s.

EURGBP Daily chart

 

Again, looking a bit closer, to take the pressure off the big figure, it needs to get above 0.8520, 0.8530/35 and then 0.8550. You need a plenty of patience with this one though.

EURGBP 1 Hour chart

To summarise, this meeting should pass by without too much fuss but as traders, we need to plan for the known unknowns, and that’s the future for policy after this meeting. I do feel a bias for EUR going higher after the meeting but as we know, we can’t hold a short-term view for longer than the next US data point.  Trade the levels, not your guess on direction and trade well.