- The European Central Bank is likely to leave interest rates unchanged again at its April meeting.
- ECB President Christine Lagarde could change her cautious tone and hint at an upcoming rate cut in June.
- The US CPI was higher than expected in March, causing risk aversion.
- EUR/USD bears gain momentum and the pair settles below 1.0800.
The European Central Bank (ECB) will announce its monetary policy decision on Thursday. Market participants do not foresee any changes to current policy, but policymakers continue to pave the way for interest rate cuts in June. The ECB has tightened rates to fight inflation that spiked after the pandemic, raising the Main Refinancing Operations rate to 4.50% and the Deposit Facility rate to 4% from negative levels in just over a year.
Beyond the rates, the ECB is using other tools: the Asset Purchase Program (APP) and the Pandemic Emergency Purchase Program (PEPP). The former is being reduced methodically and predictably as the Eurosystem ceases reinvestments of maturing securities. Regarding the PEPP, the central bank planned to reduce the portfolio by an average of 7.5 billion euros per month starting in the second half of 2024 and to cease reinvestments under the PEPP at the end of 2024. No changes are expected in this regard either. at the April meeting.
European Central Bank decision on interest rates: What to know in the markets on Thursday
Major central banks held interest rates steady in the first quarter of 2024, saying they would need more data before reversing their current restrictive monetary policies. In general, policy makers agree that interest rates have reached their cycle highs.
The US Federal Reserve (Fed) forecast three rate cuts in 2024 in its December Summary of Economic Projections (SEP), and repeated this in the March document. However, recent comments from Chairman Jerome Powell dampened expectations as he stated that policymakers are in no rush to cut rates.
At this point, the ECB is likely to cut rates before the Fed, which would be quite notable and could put pressure on the EUR/USD pair.
The latest surveys from Hamburg Commercial Bank (HCOB) and S&P Global delivered a positive surprise in the Eurozone, as March composite PMIs showed business activity growing for the first time in more than a year.
At the March meeting, the ECB forecast that headline inflation would decline from 5.4% in 2023 to 2.3% in 2024 and then to 2.0% in 2025, reaching 1.9% in 2026. At the same time , policymakers expect real GDP to increase by 0.6% in 2024, 1.5% in 2025 and 1.6% in 2026.
The United States published the Consumer Price Index (CPI) for March on Wednesday, which was higher than expected, sending financial markets into a spiral of risk aversion. The US dollar soared while stocks plunged as the numbers gave the Fed plenty of time before cutting interest rates.
The EUR/USD pair heads into the ECB announcement gaining bearish momentum and trading well below the 1.0800 threshold.
What can we expect from the ECB meeting and how could it affect EUR/USD?
The ECB is expected to leave the three main interest rates unchanged. In March, the central bank announced that “the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.5%, 75% and 4.00%, respectively,” and reiterated that local policymakers intend to keep rates at current levels for as long as necessary and that decisions will be made based on data.
European policymakers have come a long way since their December meeting, when President Christine Lagarde's efforts focused on curbing expectations of rate cuts. In these last three months, however, several policymakers have sounded much more optimistic about the possibility of cutting rates as early as June. The ECB seems more convinced than the Fed of the need to reverse the current monetary policy.
Furthermore, macroeconomic data has reinforced market expectations for a rate cut, with money markets currently pricing in a cut by June, betting on 90 basis points (bps) of cuts by December and a total of 150 bps by September 2025.
According to preliminary data from Eurostat, euro zone inflation slowed to 2.4% in March, better than expected. The core inflation rate, which excludes energy, food, alcohol and tobacco prices, also dropped to 2.9% from 3.1% in February, further raising the odds of a coming rate drop.
If the ECB maintains rates, as expected, attention will focus on the press conference of its President, Christine Lagarde, after the announcement. Lagarde has been cautious with her words, emphasizing the need to keep rates higher for longer amid the risk of price pressures resuming and that policymakers are dependent on data. But if officials are really thinking about a rate cut in June, they would have to pave the way for it at this meeting.
The Euro could appreciate in initial reaction to the news, although rate cuts tend to weaken the currency. If the ECB cuts rates before the Fed, EUR/USD should turn bearish. It may be too early to consider this, but surely if Lagarde is more explicit about the upcoming cuts, the market will react accordingly.
The EUR/USD pair plummeted with higher-than-expected inflation figures in the US and has room to extend its decline. Valeria Bednarik, chief analyst at FXStreet, points out: “Markets are watching central banks these days and the growing imbalances between the Fed and the ECB. The former does not have much to worry about, as inflation could be above of the central bank's target, but it is far from dramatic, while, at the same time, the economy continues to grow at a healthy pace. The ECB, however, continues to struggle to see economic growth, while inflation moves closer to target around 2%. There is an increasing chance that the ECB will cut rates before the Fed, in which case EUR/USD has just started a bearish trend.”
Bednarik adds: “From a technical point of view, the daily chart supports further declines, as the technical indicators retreated from their midlines and gained bearish traction. The indicators are heading firmly south within negative levels, reflecting a increased selling interest At the same time, EUR/USD is developing well below all of its moving averages, with the 20 SMA accelerating south among the longest, also a sign that sellers are taking control. Support lies at 1.0720 and 1.0685, while below the latter EUR/USD could test the 1.0600 mark. Short-term sellers line up around 1.0800, while that the firmest resistance level is located at 1.0870”.
economic indicator
ECB monetary policy statement
At each of the eight meetings of the governing council of the European Central Bank (ECB), the ECB publishes a brief statement explaining its monetary policy decision, in light of its objective of achieving its inflation target. The statement may influence the volatility of the Euro (EUR) and determine a positive or negative trend in the short term. A dovish stance is considered bullish for the euro, while a dovish stance is considered bearish.
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Fountain: European Central Bank
Frequently asked questions about the Euro
What is the Euro?
The Euro is the currency of the 20 countries of the European Union that belong to the euro zone. It is the second most traded currency in the world, behind the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily volume of more than $2.2 trillion per day.
EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2% ).
What is the ECB and how does it influence the Euro?
The European Central Bank (ECB), headquartered in Frankfurt, Germany, is the reserve bank of the euro zone. The ECB sets interest rates and manages monetary policy
The ECB's main mandate is to maintain price stability, which means controlling inflation or stimulating growth. Its main instrument is to raise or lower interest rates. Relatively high interest rates – or the expectation of higher rates – tend to benefit the Euro and vice versa.
The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are made by the heads of the eurozone's national banks and six permanent members, including ECB President Christine Lagarde.
How do inflation data influence the value of the Euro?
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), are important econometric data for the euro. If inflation rises more than expected, especially if it exceeds the 2% target set by the ECB, it is forced to raise interest rates to bring it back under control.
Relatively high interest rates compared to their peers tend to benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
How do economic data influence the value of the Euro?
Data releases measure the health of the economy and can influence the Euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can 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 raise interest rates, which will directly strengthen the Euro. Conversely, if economic data is weak, the Euro is likely to fall.
The economic data for the four largest economies in the eurozone (Germany, France, Italy and Spain) are especially significant, as they represent 75% of the eurozone economy.
How does the trade balance affect the Euro?
Another important 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 during a given period.
If a country produces highly sought-after export products, its currency will appreciate due to the additional demand created by foreign buyers wishing to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
