Ella 
This week saw the release of some key Eurozone data that reinforced expectations that the European Central Bank (ECB) will begin to gradually ease monetary policy. Both the first-quarter labor cost index and the ECB’s negotiated wage indicator suggest wage pressures will continue into early 2024, while the May PMI survey suggests the euro zone economic recovery is continuing and indeed gathering momentum.
While the ECB is expected to unequivocally cut interest rates by 25 basis points in June, it is expected to pause cuts in July before cutting rates by another 25 basis points in September. By Q4, we expect wage and price pressures to have sufficiently eased, with the ECB to cut interest rates by 25 basis points in a row in October and December. The base case forecast is that the ECB will cut interest rates by 100 basis points this year, taking the ECB deposit rate to 3.00% by the end of 2024.
If wage or price inflation fails to slow as we expect, risks over the remainder of the year tilt toward a cumulative 75 basis points rate cut to 3.25%. That said, even under this risk scenario, the 75-100 basis points of rate cuts we forecast are higher than the ECB rate cuts that market participants are currently pricing in. Based on market pricing, coupled with our forecasts for the ECB and Fed’s respective monetary policy paths, we believe the euro is likely to weaken towards the end of 2024.
