The European Central Bank is expected to cut interest rates again on Thursday after eurozone inflation fell below its 2 per cent target last month.

Financial markets anticipate another 25 basis point cut to the ECB's key deposit rate from 2.25 to 2 per cent, ahead of further cuts later in the year. 

However, analysts say the outlook could easily be swayed by the outcome of trade negotiations between the EU and the US.

It follows official data earlier this week that showed eurozone inflation eased more quickly than expected in May, falling to 1.9 per cent from 2.2 per cent in April.

Another cut on Thursday will mark the eighth reduction since September 2023 when the rate stood at 4 per cent and annual eurozone inflation was 4.3 per cent, down from a peak of 10.6 per cent in October 2022.

Investors now think the ECB's main deposit rate will fall to 1.75 per cent by the end of the year.

By contrast, investors currently think the Bank of England will cut the UK base rate from its current level of 4.25 per cent to as low as 3.75 per cent by year-end, though 4 per cent is seen as equally plausible.

Similarly, the largest bulk of forecasters expect the US Federal Reserve's target range for the federal funds to fall from its current level of 4.25 to 4.5 per cent to 3.75 to 4 per cent by the end of 2025.

Senior fund manager at Columbia Threadneedle Dave Chappell expects the ECB to follow another 25bps cut tomorrow, with typically 'guarded' guidance that leaves 'the door ajar for an additional move in July'.

However, much of the outlook for interest rates and the eurozone economy could be out of the ECB's hands.

Chappell said: 'The continued uncertainty around how trade negotiations might play out will likely leave growth and inflation prospects supportive of further moves over the coming months.'

Gabriele Foa, portfolio manager at Algebris Investments, added: 'Much will depend on external developments — particularly following, the US Court of International Trade's decision against President Trump's ability to impose sweeping tariffs, which is now heading for appeal and ultimately expected to reach the Supreme Court.

'Nonetheless, the ECB must balance the need to support growth against the risk of a resurgence in inflation. 

'If tariffs escalate to 50 per cent, the ECB may be forced to respond more aggressively. The stage is set, and the pressure is mounting.'