The European Central Bank (ECB) has finally cut its key interest rate, marking the first reduction since September 2019. This move brings the rate down from its previous record of 4% to 3.75%, which has been maintained since September 2023.

Hawkish Revision to Inflation Projections

ECB staff revised their annual average headline inflation forecasts for 2024 and 2025 upward to 2.5% and 2.2%, respectively, indicating a slight uptick from the previous estimates. However, the 2026 projection remained steady at 1.9%. "There will be bumps on the road towards the 2% inflation target," President Lagarde said on Jun 6, 2024.

Is ECB Hesitant for Next Rate Cut?

Money markets had already anticipated this 25-basis point reduction at the June meeting. President Lagarde now subtly conveyed the ECB's cautious stance on a potential July rate cut, which suggests that September could be the month for the next rate cut, indicating the ECB's uncertainty amid evolving economic conditions.

Bond yields rose post the ECB move as hawkishness has been noticed in the projections and the ECBs comments. No wonder, Invesco CurrencyShares Euro Currency Trust FXE rose 0.15% on Jun 6, 2024.

Comparison With Other Central Banks

The ECB's move precedes any similar action by the Federal Reserve, which remains cautious due to U.S. inflation rates. Canada, Sweden and Switzerland have already announced rate reductions this year, indicating a global trend toward lowering borrowing costs.

Was There Any Hawkishness in the Last Meeting?

Some conservative ECB policymakers expressed regret about the explicit signaling of a rate cut, suggesting they might have voted differently without such commitment. However, despite the internal debate, the ECB remains committed to basing decisions on incoming data.

ETFs in Focus

Although Eurozone ETFs gained initially, the stint of hawkishness weighed on them in after-market hours on Jun 6, 2024. Currency-hedged ETFs underperformed more after hours. iShares MSCI Eurozone ETF EZU gained 0.27% on Jun 6 while it dipped 0.8% after hours.

On the other hand, iShares Currency Hedged MSCI Eurozone ETF HEZU rose 0.16% on Jun 6 and fell 1.8% after hours. Meanwhile, the broader Europe ETF Vanguard FTSE Europe ETF VGK gained 0.4% on Jun 6 and 0.11% after hours.

Zacks Investment Research

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