Euro Rates Today: Barclays warn the ECB will cut interest rates on Thursday

By Rob Samson

The euro exchange rate (EUR) complex could come under pressure today should the ECB spring a surprise.

The EUR is seen to be steady in the run-up today's ECB policy announcement. Most analysts are predicting the Bank to keep rates and policy steady. But there are risks as communicated by Barclays.

Ahead of the decision, a look at today's euro rates shows:

Barclays have today told clients that they expect the ECB to ease monetary policy further on Thursday the 6th of March.

The call comes as a reminder that complacency should not be courted with regards to the euro exchange rate complex today.

Any cut will likely send the euro plummeting against the likes of the US dollar, the British pound and a now bullish Australian dollar.

While an interest rate cut is predicted by Barclays analysts confirm it is a very close call given the mixed signals from recent data flow.

"We see the economic recovery as on track but it is too weak to generate upward price pressures, while internal devaluation and deleveraging in many member states continues," says Thomas Harjes at Barclays.

At its 6 February Governing Council Meeting, the ECB left rates unchanged, but ECB President Draghi made it clear that they were on high alert and monitoring incoming data closely for signs that disinflationary pressures could rise.

February inflation inched up to 0.8% y/y, from 0.7% in January. While energy price inflation fell to negative 2.2%, prices for non-energy goods rose by 0.6%, up from 0.2% the previous month.

Service price inflation picked up somewhat further, to 1.3% (all numbers y/y).

"Soft annual inflation readings were expected for Q1 due to negative base effects (including the spike in Brent oil prices a year ago at the onset of the Syria crisis), but these base effects will soon fade, and our 2014 and 2015 projections for average inflation are at 0.9% and 1.1%, respectively," says Harjes.

Market-based measures of inflation expectations have dropped sharply since the beginning of this year for the policy-relevant horizon (about 1-2 years ahead), and even for 2018, markets currently price inflation at only about 1.3%, expecting a prolonged period of low inflation.

The very long-term expectations (ECB’s preferred market-based measure is 5y5y forward breakeven rates), however, remain anchored around 2% (Figure 2).

At the most recent policy meeting, the ECB announced that it will bring forward the publication of its two-year-ahead forecast (for 2016) to March instead of December, possibly in an attempt to better guide market expectations.

"We expect some downward revisions to the ECB 2014/15 inflation projections (currently 1.1%/1.3%).The 2016 inflation forecast will be critical and could be around 1.5%" says Harjes.