ECB Cautious Amid Growth Concerns as December Rate Decision Looms

In their last meeting, the European Central Bank (ECB) delivered a 25bps rate cut but avoided signaling further reductions, emphasizing a data-dependent approach amid persistent concerns about slowing growth. Eurozone PMIs, weak German IFO data, and subdued inflation have kept the ECB on edge, with markets pricing an 86% chance of another 25bps cut in December. However, stronger-than-expected Q3 GDP growth (0.4% QoQ vs. 0.2% forecast) and rising German inflation could prompt some ECB members to reconsider the pace and extent of future cuts.

Isabel Schnabel, a key ECB official, has advocated against deeper cuts yesterday seeing only limited room for further rate cuts, suggesting a neutral rate near 2-3% and favoring a gradual policy approach. Her comments have narrowed the euro-dollar rate differential, providing short-term support for EUR/USD. Despite this, political risks, including tensions in France and looming German elections, continue to weigh on the euro.

Looking ahead, next week’s U.S. labor market data, particularly the ADP and NFP reports, pose significant risks to the EUR/USD outlook. Strong U.S. job numbers could reinforce the Fed’s hawkish stance, driving further USD strength and putting downward pressure on the euro. Meanwhile, the ECB will closely monitor German inflation and European Commission confidence data to gauge whether economic resilience can offset ongoing headwinds.

With Christine Lagarde set to address Europe’s response to U.S. trade tariffs, market participants will be watching for any shifts in ECB rhetoric ahead of the December meeting. In the near term, EUR/USD may face resistance around 1.0600, with a drift back toward 1.0500 likely in quiet markets as traders await clarity on the economic outlook from both sides of the Atlantic while the US are on their Thanksgiving long weekend.