Euro Softens After Stournaras Lays Out a Rate Cut Roadmap

Above: File image of Yannis Stournaras, Image: European Central Bank.

Euro exchange rates were back under pressure after a prominent European Central Bank gave a clear signal that a series of interest rate cuts would commence from mid-year.

The Pound to Euro exchange rate recovered some of this week's losses and went back above 1.17 after Yannis Stournaras, ECB Governing Council (GC) member and Governor of the Bank of Greece, alluded to the prospect of as many as two interest rate cuts by the summer.

The Euro to Dollar exchange rate, which has held up rather well this week, pulled back to 1.0940.

"We need to start cutting rates soon so that our monetary policy does not become too restrictive," Stournaras said in an interview in London. "It is appropriate to do two rate cuts before the summer break, and four moves throughout the year seem reasonable. Insofar, I concur with the markets' expectations."

It must be noted Stournaras has not traditionally been classed as a 'dove', i.e. one who you would expect to clamour for interest rate cuts, suggesting a broader shift towards lower rates is underway at the ECB.

"The game is afoot," says Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics. "We never really bought the idea of them cutting only at 'forecast meetings'. Once they start, and assuming a fall in inflation matching expectations, they'll cut every meeting." 

Stournaras laid out a roadmap that would see two cuts before the spring break, i.e. June and July. He said a further 50bp of cuts would be appropriate for the last three meetings of the year, confirming 100bp of cuts in total.

He ruled out April, though: "We will have only little new information before the April meeting, especially on wages at the start of 2024 - but we will get a lot more data before the June meeting. I think to cut rates already in April we will need to see the economy crashing and I don’t expect that." 

The question of timing and quantum of upcoming interest rate cuts is a key driver of global FX. The rule of thumb is that when the odds of rate cuts rise at a given central bank, relative to others, the currency it issues weakens.

For now, it appears the ECB will lead the cutting cycle: the Euro fell last week after two members of the ECB's GC raised the prospect of an April rate cut.

"It seems very probable that there will be a first rate cut in the spring," said François Villeroy de Galhau, GC member and Governor of the Bank of France. "Spring goes from April until June 21."

The ECB's March policy decision and guidance suggested June was the preferred start date of the cutting cycle.

However, de Galhau's comments and those of Bundesbank President Joachim Nagel suggest the GC could well cut in April.

"The probability is increasing that we could see an interest-rate cut before the summer break," said Nagel. "This will be data dependent, but the prospects have brightened."