Source: Zhitong Finance

As the higher-than-expected inflation data released earlier by the US prompted the market to quickly reprice global monetary policy prospects, traders are betting that the ECB and the Bank of England will cut interest rates less and more slowly this year.

Traders currently expect the ECB to cut interest rates by 25 basis points less than three times this year. In contrast, earlier this week, they expected a 50% chance of cutting interest rates for the fourth time. Although interest rate cuts starting in June are still basic expectations, this expectation is no longer fully reflected in market prices. For the Bank of England, investors are no longer fully digesting the two interest rate cuts this year.

These changes come before the ECB is about to announce its interest rate decision. Although economists expect the ECB to keep interest rates unchanged on Thursday, they will scrutinize Governor Lagarde's remarks. Data released on Wednesday showed that the US inflation rate exceeded expectations for the third month in a row, which supports a more cautious approach to easing policies. The ECB has previously stated that it will reduce borrowing costs starting in June.

As the market repriced, bond prices declined. The yield on the 10-year German benchmark treasury bond rose 4 basis points to 2.47%, the highest level since the beginning of March. On Wednesday, the euro experienced its biggest one-day decline in over a year. The price of British treasury bonds fell, and the overall yield increased by 10 basis points.

Commerzbank strategist Hauke Siemsen said: “Lagarde guarantees that the ECB will cut interest rates for the first time in June, which should calm investors' nervousness.” He added that compared to the US, economic data from the Eurozone “seem to support interest rate cuts.”

Last month, the Eurozone inflation rate fell below expectations, falling to 2.4% from 2.6% in February. The Eurozone economy has been on the verge of recession for more than a year. A recent bank loan survey showed a sharp drop in demand for corporate loans.

US Treasury bonds were little changed in early European trading after the worst sell-off in months on Wednesday. Investors expect the Federal Reserve to cut interest rates only twice this year, starting in September.

Dutch International Group strategists, including Padhraic Garvey, said: “If official data remains strong, and more importantly, if US inflation dynamics refuse to point back to the Fed's target, then the ability of the Fed to cut interest rates in the short term may be further questioned. What matters to the euro exchange rate will be how the ECB is viewed as distancing itself from these dynamics.”

The euro exchange rate is approaching its lowest level since 2024, as the ECB may start an easing cycle before the Federal Reserve puts pressure on the euro. The EUR/USD exchange rate was traded at 1.0740 before the interest rate decision was announced.

Foreign exchange strategists expect that if Lagarde suggests that the central bank will start cutting interest rates in June, there will be room for further decline in the next few weeks. MUFG's Derek Halpenny believes that the EUR/USD exchange rate may fall to 1.05.