06:22 AM EDT, 06/05/2025 (MT Newswires) -- Market attention shifts to the European Central Bank's latest policy update on Thursday, followed by Friday's United States nonfarm payrolls (NFP) report, said Mitsubishi UFG.

The ECB is expected to deliver another 25bps cut on Thursday, lowering the policy rate to 2.00%, wrote the bank in a note to clients. It would be the eighth rate cut in the current easing cycle. However, MUFG estimates the ECB will slow the pace of easing going forward now that the policy rate is more in line with policymakers' estimates of the neutral rate. After delivering Thursday's cut, MUFG expects the ECB won't cut again at next month's policy meeting. However, it is unlikely to be the end of the easing cycle and MUFG predicts one or two more cuts before year-end, depending on the outcome of the trade talks between the European Union and the United States.

The bank's current forecast for the policy rate to fall to a low of 1.50% rests on the assumption that the U.S. will impose a higher reciprocal tariff rate on the EU, adding to downside risks for the eurozone economy. It has also been supported by further reassuring evidence showing that core and services inflation in the eurozone continues to slow alongside wage growth, which should give the ECB more confidence that inflation can be sustained close target. The stronger euro and lower energy prices are disinflationary as well.

On the other hand, the new German government's plans for looser fiscal policy will create some unease over lowering rates further, pointed out MUFG. Germany's cabinet approved a package of tax breaks for companies on Wednesday worth an estimated 46 billion euros including write-offs of as much as 30% for companies purchasing movable assets between the end of June and January 2028, and additional depreciation benefits for firms acquiring electric vehicles with a gross list price of as much as 100,000 euros. Finance Minister Lars Klingbeil also plans to progressively reduce the corporate tax rate over a five-year period beginning in 2028 from around 30% to about 25%.

The package now needs approval in parliament. The new measures quickly follow on from legislation passed earlier this year to adjust the debt break to allow a significant step up in defense spending and set up a public infrastructure and climate special investment fund totalling 500 billion euros. The big shift in the outlook for German fiscal policy has been an important driver behind the stronger euro at the start of this year, added MUFG.

The euro could strengthen further against the US dollar if the ECB expresses more caution over cutting rates further at Thursday's policy meeting, according to the bank. It could help lift EUR/USD closer to the 1.1500 level.

However, MUFG doubts that the ECB would rule out further easing given recent favorable inflation developments. More important for EUR/USD direction in the near term will be the release of the latest NFP report on Friday.