As the European Central Bank (ECB) convenes for its final policy meeting of 2024 tonight, all eyes are on the potential announcement of a 25 basis point interest rate cut. This will mark the fourth reduction since the onset of its easing cycle this year, following a series of economic challenges facing the Eurozone. Should the cut materialize, it would bring borrowing costs down to their lowest level since March 2023. However, there are also expectations in the market for a more significant decrease, potentially as high as 50 basis points, reflecting the urgent need for policy adjustments amidst economic uncertainty.

The backdrop for this meeting is fraught with political instability in key Eurozone countries such as France and Germany, alongside a sharp decline in business activity across the region. These factors are compelling the ECB to consider continued easing measures. Current market pricing suggests that the ECB may eventually settle interest rates around 1.5%, at a point that indicates further loosening of monetary policy is anticipated throughout the year.

The ECB embarked on its interest rate reduction journey in June, pausing temporarily in July before continuing with cuts in September and October. As of now, the ECB's major benchmark rates stand at:

• Deposit Rate: 3.25%
• Main Refinancing Rate: 3.40%
• Marginal Lending Rate: 3.65%

Recent data illustrates that the Eurozone economy remains sluggish, with growth showing signs of stagnation. Particularly, the manufacturing sector has been facing a downturn, while growth in the services sector has also slowed. Business confidence indicators reveal a cautious stance among corporate leaders, and while inflation has been easing, consumer spending is still under pressure. The latest inflation rate in the Eurozone stands at 2.3%, slightly above the ECB's target of 2%, but this is unlikely to derail the current plan for interest rate cuts.

Investment data from the London Stock Exchange indicates expectations for the deposit rate to be cut five more times next year, possibly dropping to 1.75%. There is speculation among market players that by the end of 2025, the deposit rate could fall to as low as 1.50%. Conversely, some analysts suggest that the ECB might opt to halt the deposit rate closer to the 2% mark, aiming to balance the need for growth support with the risk of reigniting inflation.

The market will be closely monitoring comments from ECB President Christine Lagarde regarding future policy directions and potential timelines for further cuts. Any hints regarding the ECB's economic forecasts could shed light on the likelihood of more easing measures throughout 2025. Comments concerning inflation expectations and growth predictions will be particularly crucial for the Euro’s performance in the short term. Lagarde is expected to emphasize the ECB's commitment to maintaining monetary policy at restrictive levels for as long as necessary to meet inflation targets, likely reiterating a data-driven approach that avoids providing explicit forward guidance.

Moreover, investors are keenly awaiting the ECB's upcoming macroeconomic forecasts. With the latest economic data and increasing political instability among major economies, there is a possibility that growth and inflation targets may be revised downwards. The growth outlook is expected to be downgraded, while inflation may reach the ECB's 2% target sooner than previously anticipated.

In recent weeks, the Eurozone economy has become increasingly influenced by political factors, including potential trade policies and tariffs that could further impact economic stability. The failure of the French government in a recent no-confidence vote led to a collapse of the ruling coalition, resulting in an increase in bond spreads and shaking market confidence in the Eurozone.

Currently, there is a division among ECB policymakers regarding the impact of tariffs on the Eurozone economy, particularly whether they would result in inflationary or deflationary pressures. A minority of ECB decision-makers argue that tariffs will significantly weaken the Euro against the Dollar, leading to higher import costs and increased price pressures. Conversely, some officials warn that inflation could fall below the bank’s target, as elevated tariffs diminish the Eurozone's export sector.

The Euro/Dollar exchange rate has seen fluctuations, bouncing back momentarily from November lows before retracting again over the past three weeks. Despite the anticipation of the current rate cut being mostly priced into the Euro/Dollar exchange rate, any dovish stance from the ECB could further drive the Euro down, particularly if speculation about an unexpected cut of 50 basis points arises. In such a scenario, the Euro could plummet below the 1.0500 threshold against the Dollar. Even with expectations for the Federal Reserve to continue cutting rates by 25 basis points next week, the indirect support for the Euro remains limited, primarily due to the absence of confidence regarding a rebound in Eurozone economic activity next year. If the Federal Reserve slows its rate cuts next year, while the Eurozone economy shows no sign of recovery, fears of the Euro reaching parity against the Dollar will likely persist.