EUR/USD softens below 1.1800 ahead of ECB rate decision
- EUR/USD weakens to near 1.1785 in Thursday’s early European session.
- The ECB is expected to keep rates on hold at its February meeting on Thursday.
- Renewed concerns over the Fed’s independence might cap the downside for the major pair.
The EUR/USD pair loses ground to around 1.1785 during the early European trading hours on Thursday. The Euro (EUR) softens against the US Dollar (USD) as Eurozone inflation declined well below target ahead of the European Central Bank (ECB) interest rate decision. The German Factory Orders and Eurozone Retail Sales are also due later on Thursday.
Data released by Eurostat showed on Wednesday that the Eurozone Harmonized Index of Consumer Prices (HICP) inflation eased to 1.7% YoY in January, versus 1.9% prior. Meanwhile, the core HICP rose 2.3% YoY in January, compared to 2.3% in December. Both figures came in line with the expectations. These readings have fueled expectations for future ECB interest rate cuts, which could exert some selling pressure on the shared currency.
Later on Thursday, all eyes will be on the ECB interest rate decision. Analysts widely anticipate the benchmark interest rates to remain on hold for the fifth consecutive time. Traders will closely watch the ECB President Christine Lagarde's press conference for more hints about the interest rate outlook over the coming months.
"The emphasis will likely be on higher uncertainty," with only minor tweaks in communication, said Bank of America analysts. ”Our conviction in a March cut is not rock solid, but we remain convinced of an easing bias from here."
Across the pond, doubts over the Federal Reserve (Fed) independence could undermine the Greenback and act as a tailwind for the major pair. US President Donald Trump said on Thursday that he would have passed on Kevin Warsh as his nominee to lead the US central bank if Warsh had expressed a desire to hike interest rates, per Bloomberg.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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