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The European Central Bank is likely to stay on hold on Thursday.
Lagarde could leave the door open for another rate hike before the end of the year.
The ECB decision and Lagarde’s press conference will trigger euro volatility.
After the European Central Bank (ECB) concluded its monetary policy meeting on Thursday, the bank is widely expected to keep interest rates unchanged for the first time since early 2022. The ECB will simultaneously publish its latest quarterly staff forecasts, and ECB President Christine Lagarde’s press conference will be held at 12:45 GMT.
ECB interest rate decision: Market information for Thursday
EUR/USD held on to gains near 1.0750 as the US dollar (USD) remained on the back foot following mixed US consumer price index (CPI) data.
The U.S. inflation index rose at an annual rate of 3.7% in August, compared with expectations for a 3.6% rise. CPI rose 0.6% month-on-month in August, the largest monthly increase since 2023, in line with market expectations. Core CPI increased 0.3% and 4.3% respectively, compared with expectations of 0.2% and 4.3% respectively.
U.S. S&P 500 futures rose on optimism as U.S. data solidified bets that the Federal Reserve would pause.
The benchmark 10-year Treasury note yield fell to 3.21%.
On Tuesday, Germany’s ZEW economic sentiment index rose to -11.4 for September. The ZEW Institute said: “Financial market experts are even more pessimistic about the current economic situation in Germany than in August 2023.
As market focus turns to next week’s Federal Reserve policy announcement, the European Central Bank meeting will prove decisive for the near-term direction of the EUR/USD currency pair.
ECB interest rate expectations and impact on EUR/USD
The European Central Bank (ECB) is at a crossroads. The bank will face its toughest decision since it started raising interest rates in July 2022 as it battles rising risks of stagflation. Annual inflation in the euro zone was 5.3% in August, down sharply from 10.6% in October 2022. However, core inflation remains above 5.0% compared with the ECB’s 2.0% target.
In the quarter to June, continental Europe’s gross domestic product (GDP) edged up 0.1% from the previous quarter. In addition, the European Commission lowered its economic growth forecast for this year and next year on the grounds that the German economy has fallen into recession.
Against this backdrop, the ECB is likely to announce at 12:15 GMT on Thursday that it will keep interest rates steady, with the deposit rate at 3.75% and the main refinancing operation lending rate at 4.25%.
Comments ahead of the crucial meeting showed that ECB policymakers are divided over upcoming policy decisions. Slovak National Bank Governor Peter Casimir said last week that he would prefer a 25 basis point hike in the policy rate at next week’s policy meeting. Klaas Knot, the president of the Dutch central bank, told Bloomberg that investors betting on a rate hike next week may be underestimating the likelihood of a hike.
Meanwhile, Bank of France Governor Francois Villeroy de Galhau said that “our options are open at the next and upcoming interest rate meeting,” he said Adding, “We are close or very close to peak interest rates.” Portuguese central bank governor Mário Centeno said the risk of “doing too much” has changed as the euro zone economic outlook has worsened in recent weeks. Get “significant”. “I believe we are close to a level where we can stop raising interest rates,” said Ignazio Vesco, governor of the Bank of Italy.
However, the market’s pricing for the European Central Bank’s interest rate decision this week has changed dramatically, as a Reuters report on Tuesday said that the European Central Bank expects inflation in the 20 euro zone countries to remain above 3.0% next year. Four consecutive tenth interest rate hikes provided support.
Reuters data shows that before the release of this report, the probability that the European Central Bank would raise the key interest rate by 25 basis points on September 14 was only 35%, and now this probability has risen sharply to 63%. The euro was supported by a resurgence of hawkish expectations from the European Central Bank, with the EUR/USD pair jumping to 1.0800.
If the European Central Bank maintains interest rates in hawkish terms and points to one more rate hike before the end of the year, EUR/USD is likely to resume its upward trend and rise towards 1.0850. A 25 basis point rate hike from the ECB would confirm a bullish reversal from multi-month lows for EUR/USD, although policy guidance and comments from President Christine Lagarde will be a catalyst for further upside for EUR/USD. The essential. Conversely, a pause in rate hikes by the ECB and lack of clarity on the central bank’s path forward would cheer the doves, pushing EUR/USD back towards 1.0650.
FXStreet Asia session chief analyst Dhwani Mehta briefly analyzed the technical outlook for the major currencies, explaining: “EUR/USD is in a leading position ahead of a key ECB meeting. However, the 14-day Relative Strength Index (RSI) remains at 50 levels The following, suggests that attempts to the upside by euro buyers may be limited.
Outlining the important technical levels for trading the EUR/USD pair, Dhwani noted: “On the upside, buyers will need to break through strong resistance at 1.0800, the confluence of the round-number mark and the declining 21-day simple moving average (SMA), to push the recovery back.” Momentum extends to the 200-day simple moving average (SMA) at 1.0828. The next upside barrier lies at the psychological level of 1.0850.”
“In addition, the key support level is located at the three-month low of 1.0686. If it continues to fall below this level, it will challenge the May low of 1.0635. If it falls below, a new downward trend towards 1.0600 will not be ruled out.”
