The possibility of the European Central Bank (ECB) intensifying its rate cuts is rapidly increasing. This is due to the fact that the eurozone's inflation rate has fallen below 2% for the first time in three years, with inflation slowing down faster than anticipated. Concerns about the economy are growing, with Germany being a prime example. The market expects the ECB to continue cutting rates before the spring of 2025. Against the backdrop of market expectations for the euro's depreciation, the likelihood of the euro exchange rate falling below 1 euro to 1 US dollar is growing larger.

"There is discussion about whether there is room for another rate cut," said Joachim Nagel, President of the Bundesbank, hinting to German media earlier in October that further rate cuts might be possible. It is rare for hawkish individuals, who are cautious about loose monetary policy, to specifically mention this. Prior to the September monetary policy meeting (which outsiders believed the ECB would definitely decide to cut rates at), his attitude was still ambiguous.

The ECB will hold a monetary policy meeting on the 17th of this month. After implementing the first rate cut in over four years in June this year, the ECB maintained the policy rate unchanged in July and further cut rates in September. Initially, the ECB was thought to be very likely to cut rates in December, but now the pace of action has accelerated, and the possibility of continuing rate cuts in October has increased.

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The change stems from "the acceleration of the slowdown in inflation" (quoting ECB President Christine Lagarde). In September, the eurozone's consumer price index increased by 1.8% year-on-year, falling below the ECB's 2% target for the first time in three years. Among the 20 countries in the eurozone, including developed countries such as Germany and France, more than half (12 countries) have a consumer price index increase below 2%.

The market has preemptively interpreted the ECB's strategy. After considering short-term interest rate market factors, the probability of a rate cut in October has reached nearly 100%. The market envisions that, following December, the ECB will continue to cut rates through the spring of next year, lowering by 0.25 percentage points each time. Fabio Balboni, a senior economist at HSBC, believes that the central bank's deposit rate, as a policy rate, will fall from the current 3.5% to 2.25% by April 2025.

ECB officials are increasingly worried that delaying rate cuts will bring risks. Isabel Schnabel, a member of the ECB's Executive Board, said in a speech on the 2nd: "We cannot ignore factors that are detrimental to economic growth." Even authoritative individuals with significant influence, like Schnabel, are beginning to shift their focus from inflation to the economy.

So far, market expectations have been forced to adjust several times. However, what is different about the current situation compared to the past is that almost everyone, including hawks, agrees with the rate cut forecast. Although rate cuts have begun, the ECB's policy rate is still at a historical high, and the monetary tightening situation has not changed. If market conditions cool down excessively, prices may unexpectedly fall. Hawks cannot ignore this.

The market's sense of accelerating the pace of rate cuts is also due to changes in the European economic situation. The German government released its autumn economic outlook report on the 9th, predicting that the country's real economic growth rate in 2024 will be -0.2%, significantly lower than the April forecast of 0.3%. If this forecast comes true, it will be the second consecutive year of negative growth for the German economy. Since the reunification of East and West Germany in 1990, this situation has only occurred once.

There are more and more "rate cut trades" in the market. After entering October, Germany's 10-year government bond yield once fell to about 2%, a new low since January. France's government bond yields are also lower than when the National Assembly elections were held this summer. Driven by rate cut expectations, a large amount of capital has flowed into the stock market, and the German DAX index has remained at its highest level.

The sentiment of expecting euro depreciation is particularly strong. Matthew Hornbach of Morgan Stanley said: "The trend of the euro will be more dependent on the dovishness of the ECB (actively cutting rates)."In adverse circumstances, by the mid-2025 period, the euro exchange rate will fall below the parity level with the US dollar. On the foreign exchange market on the 11th, the euro exchange rate remained at around 1 euro for 1.09 US dollars, down by approximately 9%. The current euro exchange rate against the yen is 1 euro for 162 yen. Deutsche Bank predicts that by the end of 2024, the euro exchange rate against the yen will drop to 1 euro for 153 yen, and by the end of 2025, it may fall to 1 euro for 143 yen.