ECB Keep Rates Steady with Tentative Inflation Downgrades, EUR/USD Rises

ECB RATE DECISION:

The European Central Bank has kept interest rates steady today while downgrading its inflation forecasts. The Central Bank also signaled an early conclusion to its last remaining bond purchase scheme, all as part of efforts to combat high inflation.

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The ECB stated while inflation has dropped in recent months, it is likely to pick up again temporarily in the near term. According to the latest Eurosystem staff projections for the euro area, inflation is expected to decline gradually over the course of next year, before approaching the Governing Council’s 2% target in 2025. Overall, staff expect headline inflation to average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026. Compared with the September staff projections, this amounts to a downward revision for 2023 and especially for 2024.

The confession by the Central Bank regarding a possible uptick in inflation in the near term saw the Central Bank reiterate the need to keep rates at the current level for a sufficient amount of time. The ECB also said it expected that economic growth would remain subdued in the near term with the economy expected to recover because of rising real incomes.

On the growth front the ECB projections estimate 0.6% for 2023 to 0.8% for 2024, and to 1.5% for both 2025 and 2026.

The ECB Press Conference Begins Shortly.

***UPDATES TO FOLLOW****

LOOKING AHEAD

The European Central Bank (ECB) face the toughest task in comparison to the BoE and the Federal Reserve. The slow growth in the Euro Area and technical recession hints at more aggressive rate cuts in 2024 which is in stark contrast to what we just heard from the Bank of England (BoE).

The comments from the ECB today do not signal a great deal of optimism with the Central Bank warning that economic growth is to remain subdued in the near term. Not a lot of pushbacks from the ECB, I did expect more and something in a similar vain to Fed Chair Powell. The downward revisions to inflation were not as significant as expected and this in part could explain the initial bout of Euro strength following the announcement.

MARKET REACTION

The initial reaction on EURUSD saw a 30-pip jump toward the daily high around the 1.0940 handle. As time passed however the euro began to lose it shine and surrendered some of its gains. Can the Euro continue its advance against the Greenback?

EURUSD Daily Chart

Source: TradingView, prepared by Zain Vawda

EURUSD has enjoyed a strong rally this week, in particular yesterday following the FOMC. The 1.1000 level remains a key stumbling block for further upside with the 1.0700 level a key area of support. These two levels could keep EURUSD rangebound for some time if price fails to break higher than the 1.1000 mark today.

IG CLIENT SENTIMENT

IGCSshows retail traders are currently SHORT on EURUSD, with 55% of traders currently holding SHORT positions. At DailyFX we typically take a contrarian view to crowd sentiment, and the fact that traders are short suggests that EURUSD may find the downside limited before price continues moving higher.

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda