ECB to join BOC in lowering top level restriction in interest rates
Paying more attention to US NFP than BOC/ECB rate cuts.
Group Research - Econs, Philip Wee6 Jun 2024
Article image
Photo credit: Unsplash/Adobe Stock Photo
Read More

EUR/USD was barely changed at 1.0870 ahead of today’s pre-committed rate cut by the European Central Bank.The governing council meeting will likely lower the main refi, marginal lending facility, and deposit facility rates by 25 bps each to 4.25%, 4.50%, and 3.75%, respectively. Like the Bank of Canada, the ECB’s rate cut would be targeted at reducing “top level” restriction. However, core inflation rose to 2.9% YoY in May from 2.7% in April, its first increase since June 2023, and above the ECB’s 2.6% forecast for 2024. CPI inflation also stalled in a 2.4-2.6% range over the past four months, near the 2.6% forecast for 2024. Hence, expect the council to emphasize the need for policy to remain restrictive for the rest of the year to get inflation to the 2% target. The ECB’s new inflation forecasts should highlight that the next steps in the easing cycle as bumpy and gradual, with data-dependent decisions made meeting by meeting. Like BOC’s meeting, EUR/USD will likely be volatile within its three-week range between 1.08 and 1.09. Barring dovish surprises from the ECB, EUR/USD will likely remain supported ahead of tomorrow’s US nonfarm payrolls holding below 200k for a second month. 

USD/CAD initially spiked to 1.3740 before ending the session lower at 1.3695, near Tuesday’s close of 1.3675. The Bank of Canada reduced its overnight lending rate by 25 bps to 4.75%, signalling that the path of rate cuts will be gradual, taking rate decisions one meeting at a time. The governing council agreed that interest rates need not be as restrictive as it had been because headline and underlying inflation eased to 2.7% YoY and 2.75% in April, below the BOC’s 3% projection for 1H24 and nearer the 2.5% forecast for 2H24. Hence, the OIS market sees a 64% chance of a back-to-back cut at the July 24 meeting and a third cut to 4.25% in the final quarter of the year. The BOC will release its new inflation forecasts at the July meeting, which will signal if it gets the evidence that the downward momentum towards the 2% is sustained. However, we also attributed USD/CAD’s recent fall to the Canadian economy exiting its flat growth in 2H23 to expand at 1.7% QoQ saar in 1Q24, faster than the US economy’s 1.3% pace. We doubt that USD/CAD will break its tight correlation with the DXY Index which we see depreciating on two Fed cuts in 2H24. 

Quote of the day
“The greatest pleasure in life is doing what people say you cannot do.”

     Walter Bagehot

6 June in history
The US Securities Exchange Act was enacted in 1934, establishing the Securities and Exchange Commission.

Philip Wee

Senior FX Strategist - G3 & Asia
[email protected]


Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.


GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.