The European Central Bank (ECB) is expected to reduce rates on Thursday, continuing an aggressive rate tightening cycle. The IBEX 35 (ESP35) is already at the record high before the ECB meeting where a potential downside signal is visible from the rising wedge pattern.
A Rate Cut By ECB: Possible Or Not?
Uncertainty surrounds the future trajectory of ECB rates following the June cuts. Existing market anticipations for rate cuts this year are below 60 basis points, corresponding to two rate adjustments with a probability of less than 50% for a third reduction. This is less than the three reductions anticipated for April and a minimum of five for January.
Citi strategists have raised their terminal ECB rate forecasts by 50 basis points to 2%, notwithstanding the decelerating tempo. Potential supply shocks precipitated by geopolitical tensions and climate policies are accountable for this adjustment. Such shocks can increase inflation volatility and the mean inflation rate in the years ahead.
Citi reports that throughout history, European equities have exhibited the highest average monthly performance during ECB policy rate regimes ranging from 2% to 3%.
Financials, constituting around 30% of European earnings, might experience advantageous outcomes from increased rates, as such rates would enhance their profit margins. The higher inflation breakeven points might favor cyclical equities over defensive ones, which would be advantageous for Europe, which is more exposed to cyclicality than the United States.
