The focal point for today will be around the European Central Bank's (ECB) January policy decision, with expectations that policymakers will stress the absence of imminent interest rate cuts. However, Westpac suggests the possibility of a cut before midyear due to weak regional data. While the ECB governing council seems inclined to signal a pause and a likelihood of no easing before mid-year, their stance remains contingent on data trends. Ongoing soft data could sustain the potential for an earlier or more pronounced easing trajectory.
Despite the eurozone economy grappling with widespread stagnation and inflation risks leaning towards the upside, arguments are aligning for the ECB to refrain from cutting rates before summer, consistent with President Lagarde's guidance last week. Escalating price pressures underscore the significance of reviewing first-quarter wage agreements' data before any policy rate adjustments. Anticipated today is the central bank maintaining a hawkish rhetoric, resisting current market expectations of a 64% probability of an April rate cut and cumulative 128 basis points rate cuts by year-end.
In the early European trading session, EUR/USD experienced a 0.7% surge, reaching a one-week high of $1.0932 following subjectively positive headline flash Eurozone PMIs. However, the pair struggled to sustain levels above the $1.09 threshold and retraced part of the early gains as US composite flash PMIs hit a 7-month high. The future vulnerability of EUR/USD hinges on President Lagarde's performance during the press conference following the rate decision later today, especially if her stance deviates from a convincingly hawkish tone.
