Above: ECB President Christine Lagarde, Athens, October 26. Photo by Adrian Petty/ECB.

According to a new analysis from Fidelity International, the European Central Bank (ECB) will strike a decidedly more dovish tone at the December 14 interest rate decision and guidance update.

The asset manager says the ECB will be confronted with new staff forecasts that will make it increasingly challenging to maintain the 'hawkish' stance of the past year, and potentially prompt markets to bring forward expectations for interest rate cuts in 2024.

The Euro-Dollar exchange rate proved relatively resilient in the wake of the ECB's October 26 decision to maintain interest rates at unchanged levels and communicate that it remained ready to raise rates again.

However, Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, says ongoing weakness in Eurozone economic data will need to be acknowledged in December.

"In our view, this hedged balancing act is largely a function of the fact that this was a non-forecast meeting and the short-run outturns have largely tracked the pre-existing projections. As a result, we believe President Lagarde found it difficult to break from the existing Council consensus without the cover of new staff forecasts," he says.

December sees new forecasts released by the ECB's staff, where a deterioration relative to the previous set of assumptions is likely.

This must be addressed by the Governing Council, inferring a more sombre tone is likely.

"We believe this newfound concern on growth outcomes is likely to presage a more definitive dovish turn at the next meeting," says Ahmed.

The Euro-Dollar pair's resilience following the October update rests with relatively steady guidance, but if a more 'dovish' turn lies ahead, the single currency might struggle to replicate such robustness.

President Lagarde said in her press conference the transmission of previous rate hikes has already been very strong, and there is still more to come.

"Taken together then, we remain of the view that the ECB has over-tightened and expect the Euro area to fall into recession this quarter or next. As a result, we expect the ECB to begin cutting rates sooner and more aggressively than current market pricing," says Ahmed.

The Euro could come under pressure if the market comes around to a similar view.