ECB widely expected to hold interest rates, focus on Lagarde

The European Central Bank is set to leave key rates unchanged after July policy meeting.
ECB President Christine Lagarde will be questioned about the possibility of a rate cut in September.
EUR/USD closes in on fresh 2024 highs ahead of the ECB’s policy announcements.

The European Central Bank (ECB) will announce its monetary policy decisions following the July meeting on Thursday at 12:15 GMT. ECB President Christine Lagarde will deliver a prepared statement on monetary policy and respond to questions at a press conference starting at 12:45 GMT.

What to expect from the European Central Bank interest rate decision?

The ECB lowered key rates by 25 basis points (bp) following the June policy meeting, as expected. With this decision, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility came down to 4.25%, 4.5%, and 3.75%, respectively. Rates are widely forecast to remain unchanged following the July policy meeting.

In June’s policy statement, the ECB reiterated that it will continue to follow a data-dependent and meeting-by-meeting approach in determining the appropriate level and duration of monetary restriction. The accounts of the meeting showed that some policymakers felt that the data available since the last meeting had not increased their confidence that inflation would converge to the 2% central bank’s target.

Previewing the ECB meeting, Deutsche Bank macro analysts said they expect the Governing Council to leave the policy settings unchanged and explained:

“Our baseline remains two more 25bp cuts in 2024, in September and December. A cut in September is not a done deal. Recent data suggest the ECB staff need to revise the near-term inflation outlook higher.”
Meanwhile, analysts at TD Securities note that markets will focus on whether the ECB softens its tone ahead of an increasingly likely September cut, adding they expect ECB President Lagarde to remain “vague and noncommittal.”

Economic Indicator

ECB Monetary Policy Statement

At each of the European Central Bank’s (ECB) eight governing council meetings, the ECB releases a short statement explaining its monetary policy decision, in light of its goal of meeting its inflation target. The statement may influence the volatility of the Euro (EUR) and determine a short-term positive or negative trend. A hawkish view is considered bullish for EUR, whereas a dovish view is considered bearish.

How could the ECB meeting impact EUR/USD?

Heading into the ECB showdown, the Euro preserves its strength, with EUR/USD trading at its highest level since March above 1.0900. The bullish action seen in EUR/USD, however, also seems to be fuelled by the broad-based selling pressure surrounding the US Dollar (USD) following the soft June inflation data, which fed into expectations for a Federal Reserve (Fed) rate cut in September.

ECB President Christine Lagarde is likely to avoid providing a clear response if she is asked about the possibility of another rate cut in September. Unless the policy statement, or Lagarde, pushes back against this expectation, the market positioning suggests that EUR/USD could have a hard time gathering bullish momentum, with investors already fully pricing in a Fed rate cut in September.

On the other hand, the Euro could come under bearish pressure if Lagarde adopts an optimistic tone on the inflation outlook and/or voices concerns over the slowdown in the Eurozone’s economic activity. Markets could see that as a sign pointing to another rate reduction in September and cause EUR/USD to correct lower.

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD:

“EUR/USD remains technically bullish in the near term, with the Relative Strength Index (RSI) indicator on the daily chart holding comfortably above 60. On the upside, 1.1000 (psychological level, static level) aligns as the next resistance. In case the pair manages to flip this level into support, it could stretch higher toward 1.1100 and touch a new 2024-high in the process.”

“If EUR/USD retreats below 1.0900 and starts using this level as resistance, technical sellers could show interest. In this scenario, an extended correction toward 1.0800 (100-day, 200-day Simple Moving Averages) could be seen. If this support stays intact, however, buyers could see this retreat as an opportunity to get back into action.”

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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