Highlights:

• There is quite a lot of speculation on the magnitude, timing, and sequence of the Fed and ECB first rate cuts.
• Historically the Fed has tended to lead policy pivots, but evidence is mixed and based on a limited number of cycles. Moreover, the difference in the nature of the 2021-22 inflation spike, more related to the global/supply factor in the euro area than in the US, further weakens the view of the ECB as a follower.
• Our new baseline forecast foresees a first Fed cut rates on 12 June. We see a total of 75bps rate cuts this year (vs. 90 bps anticipated by markets), with a risk of just 50 bps being implemented. We do not expect the incoming election to play an important role in the monetary policy decision.
• At the same time, we expect the ECB to move ahead of the Fed and start cutting on June 6 on the back of increasing evidence of disinflation. We look for cumulative cuts of 100 bps in 2024. Then the transatlantic yield spread tightening and USD weakness would be postponed.
   

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