The European Central Bank (ECB) is expected to announce a 25-basis point interest rate cut, marking the fourth consecutive reduction following cuts in September, October, and December of 2024. This decision comes amid troubling signs from Germany, Europe's largest economy, which contracted by 0.2% in the fourth quarter of 2024. Preliminary data from Destatis had previously shown a modest 0.1% expansion in the third quarter, but the latest figures have dashed hopes for stability and growth.
In the wake of these developments, the EUR/USD pair has struggled to gain momentum, trading 0.04% lower on the day at approximately 1.0415. The currency pair remains defensive as investors await key policy announcements from the ECB and upcoming US GDP data. The ECB's anticipated rate cut will lower the benchmark rate on deposit facilities from 3% to 2.75%, a move aimed at bolstering economic activity across the Eurozone.
Destatis' recent report highlights a concerning trend of stagnation in the German economy, with the annual GDP rate dropping by 0.2% in the fourth quarter after a -0.3% decline in the third quarter. These figures fell short of the estimated zero percent growth, signaling deeper economic troubles than initially projected. The Governing Council has emphasized its commitment to supporting economic activity across the common bloc, as recent data underscores the pressing need for action.
The reaction in financial markets has been muted, with traders refraining from making significant moves ahead of both ECB policy announcements and the release of US Q4 advance GDP data. The EUR/USD pair remains under pressure, reflecting investor caution in light of Germany's disappointing economic performance.
The ECB's forthcoming decision on interest rates is seen as a critical measure to address ongoing economic challenges. By reducing rates, the central bank aims to stimulate borrowing and investment, providing much-needed support to an economy grappling with stagnation. This move aligns with the ECB's broader strategy to foster economic resilience and growth within the European Union.