We expect the ECB to continue to cut on 30 January with another 25bp reduction in the policy rate to 2.75%. We expect the description of the policy stance to be largely unchanged vs December. The messaging will be consistent with further rate cuts: the policy stance will continue to be described as restrictive and the ECB will remain confident that inflation is on the right track. There will be no pre-determined path for policy and the terminal rate will be above/at/below neutral (our expectation of neutral is 1.75%-2%) depending on the data which the ECB will judge meeting-by-meeting. The main risk in January is that the tweaks to the description of the recent data lean a little hawkish relative to December (e.g., higher energy prices, domestic inflation unchanged). We expect a minimal EUR impact around the ECB meeting date, with slight upside risks: the market is already pricing two cuts for the next two meetings, and the ECB is unlikely to commit to more cuts beyond that right now, its potential caution could support the EUR slightly given positioning. But in medium term, we are bearish on Eurozone for multiple reasons: French political issues, German election results & above all continued weak economic growth. We have a view of EUR testing parity by H1CY25. ECB might need to provide all the monetary support it can by dipping below the neutral rate too and rates markets current projection of only 87 bps cut in CY25 is too optimistic.
