Synopsis:

HSBC notes that while the European Central Bank (ECB) and market expectations are currently aligned on starting the rate-cutting cycle in June, the near-term direction of the EUR will likely be influenced by further ECB communications regarding the future trajectory of rates. Upcoming speeches by ECB officials, including President Christine Lagarde, are pivotal as the market assesses the likelihood of additional rate cuts in 2024.

Key Points:

• Alignment on Initial Rate Cuts: Both ECB policymakers and financial markets anticipate the commencement of a rate-cutting cycle by the ECB in June. Any reaffirmations of this timeline in upcoming ECB communications are unlikely to significantly impact the EUR, as this expectation is already priced in.

• Focus on Future Rate Trajectory: The crucial factor for the EUR will be any new guidance on the trajectory of future rate cuts. ECB Governing Council member Simkus recently mentioned the possibility of a follow-up rate cut in July and suggested a greater than 50% likelihood of more than three rate cuts in 2024. These comments have introduced new variables for market consideration.

• ECB President Lagarde's Upcoming Speech: ECB President Christine Lagarde is scheduled to speak on Wednesday, and her remarks will be closely watched for any indications that might suggest a deviation from or confirmation of the anticipated rate path. With the market pricing in a roughly 50% chance of a July rate cut, her comments could be a significant catalyst for EUR movement.

• Market Sensitivity to Rate Expectations: The EUR remains sensitive to shifts in expectations regarding the ECB's rate-cutting strategy. Any signals that suggest an acceleration or deepening of rate cuts beyond the initial June reduction could provoke volatility in the currency's valuation.

Conclusion:

The EUR's near-term trajectory is poised to be heavily influenced by upcoming ECB communications. As market participants look for clarity on the pace and depth of future rate cuts, statements from ECB officials, especially President Christine Lagarde, will be critical in shaping currency strategies. Investors and traders should stay alert to these developments, as they could present opportunities or risks in currency markets.