The ECB will be making their next policy decision tomorrow and are widely expected to keep key interest rates unchanged. BofA is seeing just that, with only slight tweaks to the central bank's communique. And that should come via president Lagarde's press confernce.
The firm argues that Lagarde should at least acknowledge the US-EU trade deal but warn that risks to macro trends have risen since earlier this summer. BofA believes that the press conference could be viewed as slightly more dovish, though Lagarde is set to emphasise on flexibility again while avoiding to pre-commit to any further moves still.
As things stand, traders are only pricing in ~7 bps of rate cuts by year-end with ~17 bps only priced in by June 2026. But BofA views that rates could end up being lower than what forwards are implying, given the growth risks to the euro area economy and tighter financial conditions.
In terms of FX reactions, they see a slightly negative risk for the euro from tomorrow's meeting decision. Of note, BofA highlights that they are leaning bearish on the euro against the pound and aussie. But overall, they anticipate that this week's meeting will be very limited in terms of FX impact.
