To Cut or Not to Cut – That is the Question…

Another wave of central bank policy decisions kicks off this week with the Bank of Canada (BOC) and the European Central bank (ECB) scheduled for Wednesday and Thursday. Following the Consumer Price Index (CPI) data out of Europe last week, markets are expecting that the ECB will be the first of the major central banks to lower rates. The current rate is at 4.50%, as it has been since September 13, 2023 when the ECB last hiked 25bps. But conditions have changed, with Consumer Price Index below expectations on a month-over-month basis and at 2.6% on a yearly basis.

The president of the ECB, Christine Lagarde, recently commented on how the Eurozone is seeing a clear path to recovery and analysts think she’s ready to begin cutting.

And while it may not matter who cuts first so much, what does matter is the decision to cut could weaken the euro currency (/6E), which bolsters the U.S. dollar. If we start to see the dollar rally it could pose a threat to the move up we’ve seen in stocks to all-time highs. A big part of that rally has been dollar-related, as the dollar has remained relatively contained over the last year amidst all the speculation about rates and the ups and downs in yields. While the dollar has remained relatively contained over the last year, we've also seen a pretty good inverse correlation on an intra-day basis with strength in the U.S. dollar tending to lead to weakness in stocks, especially if it's tied to higher yields.

The ECB won't be the first to announce, but they are expected to be the first to act. We'll hear from the Bank of Canada (BOC) on Wednesday, June 5. Next week, keep an eye out for decisions from policy makers here in the U.S.: the FOMC will announce on June 12, and the Bank of Japan (BOJ) June 14.