ECB Decision and Lagarde’s Remarks Awaited: How Will They Impact EUR/USD?

The European Central Bank (ECB) is set to announce its interest rate decision on Thursday, and market participants are eagerly awaiting the outcome. ECB President Christine Lagarde’s press conference will follow shortly after, making this a pivotal moment for the Euro (EUR) and the EUR/USD currency pair.

Here’s what to expect and how it may influence EUR/USD:

ECB Expected to Maintain Interest Rates: It is widely anticipated that the ECB will keep interest rates unchanged, a move that would break a trend of rate hikes that began in July 2022. The Deposit Rate is expected to remain at 3.75%, while the main Refinancing operations lending rate is likely to stay at 4.25%.

Inflation and Economic Challenges: The ECB faces a complex decision as it deals with the challenges of stagflation—a combination of stagnant economic growth and high inflation. Eurozone’s annual inflation stood at 5.3% in August, down significantly from 10.6% in October 2022. Core inflation, which excludes volatile items, remains above the ECB’s target of 2.0%. Additionally, economic growth in Europe has been sluggish, with only a marginal 0.1% expansion in GDP in the second quarter of 2023.

Hawkish and Dovish Divisions: ECB policymakers appear divided on the upcoming decision. Some, like Peter Kazimir, Governor of the National Bank of Slovakia, advocate for a 25 basis points (bps) rate hike at this meeting. On the other hand, Klaas Knot, President of the Dutch central bank, believes that investors underestimating the likelihood of an interest rate increase may be mistaken. Conversely, Francois Villeroy de Galhau, Governor of the Bank of France, and others have expressed dovish views, suggesting that the ECB may be near or at the peak of its rate-hiking cycle.

Market Sentiment Shift: Market expectations for the ECB’s rate decision shifted dramatically following a Reuters report stating that the ECB expects Eurozone inflation to remain above 3.0% next year. This boosted the chances of a tenth consecutive rate hike on Thursday from 35% to 63%, according to Reuters data.

EUR/USD Outlook: The EUR/USD currency pair has been hovering around 1.0750. If the ECB maintains rates but adopts a hawkish tone, hinting at a potential rate hike by year-end, EUR/USD could resume its climb toward 1.0850. A confirmed bullish reversal from recent lows would require an actual rate hike, but Lagarde’s guidance will also be crucial. Conversely, if the ECB pauses its rate hikes and provides little clarity on its future path, doves may push EUR/USD back down toward 1.0650.