European Central Bank (ECB) is set to announce another rate hike on June 15, Wednesday, having slowed down its pace of tightening in the previous meeting. The policy statement will be accompanied by the staff economic projections, followed by the press conference.
ECB President Christine Lagarde will helm the presser and her words will be closely scrutinized for the central bank’s future interest rates path. In the lead-up to the ECB policy announcements, EUR/USD has been on a corrective decline from monthly highs while holding the 1.0800 level, undermined by the US Federal Reserve’s (Fed) hawkish pause on Wednesday.
European Central Bank interest rates decision will be announced at 12:15 GMT, followed by Lagarde’s presser at 12:45 GMT. Money markets are pricing a 95% probability of the central bank raising the key interest rates by 25 basis points (bps) on Thursday, lifting the benchmark Deposit Rate from 3.25% to 3.50%.
At its May meeting, the ECB delivered a 25 bps rate hike, downsizing from the 50 bps rate hike announced in March. At the post-monetary policy meeting press conference, ECB President Christine Lagarde said, “based on the information we have today, we have more ground to cover, and we are not pausing. It’s extremely clear.” Lagarde later added, “This is a journey. We have not arrived yet.”
Since the May meeting, the Eurozone economic performance has been quite mixed but enough to hint at another ECB rate hike. Eurozone inflation declined sharply, with the annual Harmonised Index of Consumer Prices (HICP) rising 6.1% in May vs. April’s 7.0% increase, the latest data published by Eurostat revealed. The Core HICP inflation dropped to 5.3% YoY in May as against the expected 5.5% clip, down from the 5.6% figure booked in April.
Following the inflation data and while speaking at the Hearing before the Committee on Economic and Monetary Affairs (ECON) of the European Parliament in Brussels, ECB Chief Lagarde reiterated that “underlying inflationary pressures remain high,” adding that there is "no clear evidence that underlying inflation has peaked."
Meanwhile, the bloc entered a technical recession at the start of the year after Eurostat cut its earlier estimate of 0% growth in the final quarter of 2022 and 0.1% growth in the first quarter of 2023 to 0.1% contractions in both periods.
Against mounting economic concerns, economists expect one more 25 bps rate hike in July following June’s, adding that “the deposit rate is expected to remain at 3.75% for nearly a year to ensure inflation retreats sustainably,” the Bloomberg survey revealed.
Therefore, the Euro’s fate hinges on the European Central Bank’s (ECB) inflation and growth projections, with a 25 bps rate hike fully baked in. Further, President Lagarde’s outlook on the interest rates will be also critical to EUR/USD’s next directional move.
The Euro is likely to come under intense selling pressure should Lagarde hint at pausing rate hikes after July, which could knock down the EUR/USD pair toward 1.0700. On the other hand, the main currency pair could recapture 1.0850 and beyond if Lagarde sticks to the central bank’s commitment to bringing inflation back toward the 2.0% target. At the moment, inflation in the old continent is more than thrice the Bank’s target.
Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “Despite the pullback from monthly highs, EUR/USD managed to settle Wednesday above the 100-Day Moving Average (DMA) support at 1.0805, where it now wavers. The 14-day Relative Strength Index (RSI) has turned lower but remains above the 50 level, keeping Euro buyers hopeful ahead of the ECB decision.”
Dhwani also outlines important technical levels to trade the EUR/USD pair: “On the upside, EUR/USD buyers need to take out the flattish 50 DMA barrier at 1.0875 on a sustained basis to confirm a bullish reversal from two-month troughs near 1.0635. The next relevant resistance is seen at the 1.0900 threshold.”
ECB Interest Rate Decision is announced by the European Central Bank. Usually, if the ECB is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the EUR. Likewise, if the ECB has a dovish view on the European economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative, or bearish.
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