The European Central Bank (ECB) is poised to convene its initial monetary policy meeting for the year on Thursday, with expectations of a status quo in interest rates. The Main Refinancing Operations Rate is anticipated to be maintained at 4.50%, and the Deposit Facility Rate at 4%. The central bank may continue its “tightening” strategy through a reduction of reinvestments in the Pandemic Emergency Purchase Programme (PEPP).
Despite signaling potential rate cuts in 2024, the ECB remains cautious, demanding further evidence that underlying inflation is under control before taking such a bold step.
In December, the Governing Council opted to keep key interest rates unchanged, recognizing a dip in inflation while expecting price pressures to pick up temporarily in the near term.
Global central banks, including the US Federal Reserve, have maintained rates steady in the last quarter of 2023, prioritizing economic stability over inflationary concerns. The US Fed envisions three rate cuts throughout 2024, exercising caution despite optimistic market sentiment.
The EUR/USD pair, which peaked at 1.1139 by the end of December, has since experienced a downward trend, currently trading below the 1.0900 mark.
Simultaneously, the United States is set to release the preliminary estimate of Q4 Gross Domestic Product (GDP) alongside the ECB’s announcement. Wall Street has seen record highs this week as investors anticipate potential interest rate adjustments.
The ECB’s January Bank Lending Survey (BLS) indicates tightening credit standards amid persistent risk perceptions. Eurozone Consumer Confidence declined to -16.1 in January, while the preliminary HCOB/S&P Global Producer Manager Indexes (PMIs) suggest a slowdown in business activity.
Investors await the ECB’s decision, where it is widely expected to reiterate the December choice of leaving key interest rates unchanged. However, uncertainties loom, with recent comments from European policymakers hinting at the possibility and timing of rate cuts.
ECB President Christine Lagarde has pushed back against expectations of rate cuts, emphasizing the need to balance economic risks. A potential dovish shift in Lagarde’s tone may surprise markets and impact the Euro negatively.
As markets adopt a wait-and-see approach, the EUR/USD pair lacks directional strength, with analysts noting a bearish bias in the technical perspective. The pair faces challenges around the 1.0845 level, with recovery beyond 1.1000 needed for potential bullish momentum.
The ECB’s decision and Lagarde’s communication will play a crucial role in shaping market sentiment and determining the Euro’s trajectory in the coming weeks.