European Central Bank Decision Preview: Interest rates expected to remain unchanged as inflation weakens

• The European Central Bank is set to hold interest rates for the fourth meeting in a row.
• ECB President Christine Lagarde could dismiss early rate cut expectations once again.
• The Euro’s reaction is likely to depend on the ECB’s updated forecasts and Lagarde’s speech. 

The European Central Bank (ECB) is widely expected to keep the key interest rates on hold for the fourth policy meeting in a row, in a decision that will be published on Thursday at 13:15 GMT.

The policy announcements will be accompanied by the updated economic projections, followed by ECB President Christine Lagarde’s press conference at 13:45 GMT.

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

Economists are expecting the ECB to keep its three key interest rates steady, with the benchmark Deposit Rate at 4.0%, following the conclusion of the Governing Council’s March monetary policy meeting.

The central bank is likely to downgrade its forecasts for inflation and growth in its staff projections. The economic forecasts unveiled at the December meeting showed that the ECB estimated GDP to expand by 0.8% in 2024 from 1% previously estimated. Headline inflation was expected to average 2.7% in 2024 and 2.1% in 2025. The Bank had previously forecast price growth of 3.2% in 2024 and 2.1% in 2025.

Data published by Eurostat showed on Friday that the Eurozone annual Harmonised Index of Consumer Prices (HICP) rose 2.6% in February, cooling from a 2.8% increase in January but above the expected 2.5% growth in the reported period. The Core HICP inflation declined to 3.1% YoY in February, compared with January’s 3.3% reading while beating expectations of 2.9%.

Further, ECB’s closely watched indicator of Euro area’s negotiated wages grew at an annual rate of 4.50% in Q4 2023, slowing from a 4.70% increase in the third quarter.

With inflationary pressures easing and many ECB policymakers making it clear they want to see a further deceleration in wage growth, money markets are pricing in an interest rate cut for the June meeting, as against the previous expectations of a September rate cut.

Speaking in a Bloomberg interview on the sidelines of the World Economic Forum (WEF) Annual Meeting in Davos, back in January, ECB President Christine Lagarde said, “it is likely that we will cut rates by the summer.”

However, when asked about the timing of cuts at the post-policy meeting press conference a week later, Lagarde said that the central bank was “data dependent, not time dependent.”

That said, Lagarde is likely to maintain its hawkish bias until the Eurozone indicator of negotiated wage rate for the first quarter is released on May 23.

Testifying before the European Parliament last month, President Lagarde said "our restrictive monetary policy stance, the ensuing strong decline in headline inflation and firmly anchored longer-term inflation expectations act as a safeguard against a sustained wage-price spiral.”

How could the ECB meeting impact EUR/USD?

In a scenario where Lagarde sticks to the Bank’s “data-dependent approach”, pushing back against expectations of an early policy pivot, the Euro is likely to attract a strong bid against the US Dollar, as the markets would perceive it as a hawkish hold.

However, a dovish shift in Lagarde’s tone, acknowledging softening wage pressures, could take the wind out of the recent EUR/USD recovery.  

Her comments will hold the key for determining the timing and scope of future interest rate cuts, significantly impacting the value of the main currency pair.

Dhwani Mehta, FXStreet’s Senior Analyst, offers a brief technical outlook for trading the Euro on the ECB policy announcements: “The EUR/USD pair broke through the critical 50-day Simple Moving Average (SMA) at 1.0857 on Wednesday, opening the door for further upside. The 14-day Relative Strength Index (RSI) holds comfortable above the midline, backing the pair’s bullish potential.”

“Acceptance above the 1.0950 level is likely to refuel the upside momentum toward the 1.1000 psychological level. EUR buyers will then aim for the 1.1050 key level. Conversely, the initial demand area is seen around the 50-day SMA at 1.0857, below which a test of the 1.0835 support will be inevitable. That level is the confluence of the 100- and 200-day SMAs. Further south, the 21-day SMA at 1.0811 could come to the rescue of EUR/USD,” Dhwani adds.