Euro remains under pressure ahead of ECB rate decision

• The ECB is expected to hold its deposit rate steady at 2.50% at Thursday's meeting.
• Energy-driven price pressures keep potential December CB rate hike expectations alive among investors.
• Markets eagerly await ECB commentary on inflation risks, growth, and future monetary policy trajectory.

EUR/USD depreciates after registering modest gains in the previous day, trading around 1.1140 during Asian hours on Thursday. The pair loses ground as the US Dollar (USD) bounces back from the previous day's losses after the Federal Reserve (Fed) kept interest rates unchanged.

The Federal Reserve held interest rates steady at 3.75%–4.00%, noting that economic activity continues to expand. In its statement, the Fed highlighted resilient domestic spending, robust capital investment, and strong productivity growth. Addressing its employment mandate, the central bank observed that job gains have kept pace with the workforce while the unemployment rate has shown little change.

On the inflation front, the Fed acknowledged that price pressures remain elevated, but it chose to pause further rate hikes to gather additional data and assess the appropriate monetary policy stance. The decision was not unanimous, as Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented in favor of an immediate rate increase.

Fed Chair Kevin Warsh reaffirmed the Federal Open Market Committee's commitment to delivering price stability and achieving its 2% inflation target, emphasizing that the underlying economy remains strong. He also outlined future scheduling for monetary policy, noting that the Fed will hold eight meetings next year—including one without a formal vote—and that he anticipates six policy-setting meetings in 2028.

Meanwhile, the Euro (EUR) faces headwinds as the European Central Bank (ECB) is expected to hold its deposit rate unchanged at 2.50% at its Thursday meeting, following a total of 50 basis points in rate increases earlier in the year. However, persistent energy-driven inflation continues to spark debate over whether policymakers might pursue another rate hike in December. Consequently, market participants are closely monitoring the ECB’s evaluation of inflation risks, economic growth, and any guidance on the future trajectory of interest rates.

Euro credit conditions tighten only modestly as ECB pass-through stays smooth

Analysts at Danske Bank highlight that the ECB’s Q3 Bank Lending Survey points to only a limited impact from recent policy moves on credit conditions. They note that “banks tightened credit standards more than expected, although the net share reporting a tightening remained low from a historical perspective and was mainly driven by banks in France.” In Danske’s view, this pattern “suggests that the ECB's tightening has so far only led to a modest tightening of credit standards and should not in itself stop the ECB from tightening further as the pass-through remains relatively smooth.”