- The European Central Bank is expected to cut key rates by 25 basis points at its September policy meeting.
- ECB President Christine Lagarde’s press conference and updated economic forecasts will be closely scrutinized for fresh policy signals.
- The ECB’s policy announcements are bound to inject volatility into the EUR/USD pair.
The European Central Bank (ECB) interest rate decision will be announced alongside the publication of updated staff economic projections following the September monetary policy meeting on Thursday at 12:15 GMT.
ECB President Christine Lagarde’s press conference will start at 12:45 GMT, where she will deliver the prepared statement on monetary policy and answer questions from the media. The ECB’s announcements are likely to shake the Euro (EUR) against the US Dollar (USD).
What to expect from the European Central Bank’s interest rate decision?
After holding interest rates on hold in July, the ECB is widely expected to cut key rates by 25 basis points (bps) at its September policy meeting. Interest rates on the main refinancing operations, the marginal lending facility and the deposit facility are likely to be cut to 4.0%, 4.25% and 3.50%, respectively.
At the press conference following the June policy meeting, ECB President Christine Lagarde said: “We are determined not to have a predetermined rate path. The September decision is completely open.” “The September projections, in addition to other data, will be taken into account,” Lagarde added.
Minutes of the ECB’s July meeting showed that September “was widely seen as a good time to reassess” the level of monetary policy tightening.
Since the July meeting, inflation in the Eurozone has cooled significantly, moving closer to the central bank’s 2.0% target.
Preliminary data from Eurostat showed on Aug. 30 that the Harmonized Index of Consumer Prices (HICP) in the currency bloc rose 2.2% on the year in August, marking the lowest annual inflation rate since July 2021. Meanwhile, negotiated wages in the eurozone rose at an annual pace of 3.55% in the second quarter of 2024 after rising 4.74% in the first quarter of this year.
The ECB minutes, combined with a sharp decline in the pace of wage growth, cooling inflation and weakening business activity in the euro zone, suggest a rate cut is a given on Thursday.
Therefore, the ECB’s communication on the way forward and its outlook on inflation and growth will be key to the market’s assessment of future rate cuts and the next directional move of the Euro (EUR).
Ahead of the ECB meeting, analysts at TD Securities said: “A 25bps cut is almost certain. What matters will be the guidance beyond September, where there is strong pressure on both sides. Wage growth and services inflation remain strong (emboldening hawks), while growth indicators are signalling softening (emboldening doves).” “Lagarde is unlikely to rule out a cut in October, but quarterly cuts are probably more consistent with new projections,” the analysts added.
How could the ECB meeting impact EUR/USD?
Ahead of the ECB statement, the Euro is clinging to recovery gains, with EUR/USD reversing from monthly lows of 1.1020. The fate of the pair depends on the ECB’s outlook on interest rates beyond September.
ECB President Christine Lagarde is likely to stick to the bank’s data-dependent stance and refrain from giving a concrete answer on the next rate-cut move. Unless the policy statement, or Lagarde, hints at further rate cuts in the final quarter of this year, the EUR/USD rally is expected to gain further traction.
Conversely, the Euro could come under renewed selling pressure if staff projections show downward revisions to both inflation and the economic growth outlook. Meanwhile, Lagarde’s increased confidence in the progress of disinflation could also rekindle Euro sellers. These factors could double down on dovish expectations, fuelling a resumption of EUR/USD’s recent downtrend.
Dhwani Mehta, Senior Analyst for the Asian session at FXStreet, offers a brief technical outlook for EUR/USD:
“EUR/USD is maintaining its bearish streak, especially after the Relative Strength Index (RSI) indicator turned back below the 50 level on the daily chart. If the sellers flex their muscles, the immediate support of the 50-day SMA at 1.0964 will be tested. Further south, the pair could target the strong demand zone near 1.0870, where the 100-day SMA and the 200-day SMA coincide.”
“On the upside, the pair needs to find acceptance above the 21-day simple moving average (SMA) at 1.1082 on a daily close to sustain the recovery towards September 6 high of 1.1155, above which the psychological level of 1.1200 will challenge bearish commitments.”
Economic indicator
Decision on ECB deposit rates
The deposit rate, announced by the European Central Bankis the interest rate paid on excess liquidity that credit institutions can deposit overnight in an account at a national central bank that is part of the Eurosystem.
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Interest Rates FAQs
Financial institutions charge interest rates on loans to borrowers and pay them out as interest to savers and depositors. These are influenced by base interest rates, which are set by central banks based on economic developments. Central banks are typically mandated to ensure price stability, which in most cases means targeting an underlying inflation rate of around 2%.
If inflation falls below target, the central bank can cut base interest rates, in order to stimulate lending and boost the economy. If inflation rises substantially above 2%, the central bank typically raises base lending rates to try to reduce inflation.
In general, higher interest rates help strengthen a country’s currency by making it a more attractive place for global investors to park their money.
Higher interest rates influence the price of Gold because they increase the opportunity cost of holding Gold rather than investing in an interest-bearing asset or depositing cash in the bank.
If interest rates are high, the price of the US Dollar (USD) usually rises and since Gold is priced in dollars, the price of Gold falls.
The federal funds rate is the overnight rate at which U.S. banks lend to each other. It is the official interest rate typically set by the Federal Reserve at its FOMC meetings. It is set within a range, for example 4.75%-5.00%, although the upper limit (in this case 5.00%) is the figure quoted.
Market expectations for the Federal Reserve funds rate are tracked by the CME’s FedWatch tool, which measures the behavior of many financial markets in anticipation of future Federal Reserve monetary policy decisions.
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.
