We expect another 25 bps cut by ECB on 5th June with almost no change in guidance. The staff projections will show downgrades in both growth & inflation. May inflation data fell for Eurozone's largest economies & we expect the disinflation trend to continue. More so because of the appreciating EUR. We expect the Euro area economy to recover only gradually in the near term due to soft consumption and structural weaknesses. We believe US tariffs will be an important short term headwind, whereas German and EU fiscal announcements will be a material tailwind only in the medium term. We are holding our 1.50% terminal rate forecast for now. Assuming we are right and trade war weighs on the economy in H2 and underlying disinflation remains intact, then a cut to 1.75% will be justifiable in September. Whether the ECB will cut to 1.50% before year-end remains to be seen. An uncertain trade policy remains the single largest impediment to ECB monetary policy forecasting. We continue to believe EUR is likely to end at 1.15-1.17 by end CY25 purely because of being the new global reserve currency as DXY strength fades due to policy uncertainty & European equities being cheap compared to US equities.
