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While US markets are preoccupied with domestic political dynamics and speculating on the release of the non-farm payrolls report, European investors are turning their attention to the upcoming ECB meeting on June 6.
The central bank is expected to announce its first interest rate cut shortly as inflation approaches the optimal level. Indeed, several governing body members, including Rehn, Villeroy, Holzmann, and Lane, have favored easing monetary policy.
But is it wise to act now?
On the one hand, disinflation in the eurozone stalled in April, and geopolitical tensions and natural disasters may hamper efforts to control prices, such as supply disruptions due to tensions in the Red Sea.
With the Houthis effectively blocking the Bab el-Mandeb strait to Western commercial vessels, global trade is experiencing a ‘domino effect’: delivery times to the US and Europe are lengthening, and freight rates have skyrocketed.
In addition, due to factors such as drought and frost, the outlook for the wheat crop has dimmed worldwide. As a result, prices for the new crop of Black Sea wheat on offer in Asia have soared to around $300 per metric tonne.
Although most importers are postponing their purchases, anticipating a fall in prices in the coming months when the harvest season begins in Russia and other producing countries, there is a risk that food prices will soar again if the situation does not improve.
On the other hand, consumer inflation expectations for the next 12 months fell to 2.9% from 3.0% in the previous month, marking their lowest level since September 2021. Meanwhile, inflation expectations fell to 2.4% from 2.5% three years ahead.
What action will the ECB take?
Despite certain headwinds, the European Central Bank is expected to lower interest rates and maintain a cautious stance in the coming months.
Regarding market impact, there are concerns that EUR/USD weaken if the ECB acts on rate cuts before the Fed does. While this scenario could play out if the divergence persists over time, it is not the most likely outcome.
No significant market movements are expected for the time being, as the likelihood of a rate cut may already be contemplated. However, the situation could change significantly if Christine Lagarde subsequently delivers an overtly dovish speech.
