The European Central Bank (ECB) interest rate decision will be announced alongside the publication of the staff’s updated economic projections following the September monetary policy meeting due on Thursday at 12:15 GMT.
ECB President Christine Lagarde's press conference will follow, beginning at 12:45 GMT, where she will deliver the prepared statement on monetary policy and respond to media questions. The ECB announcements are likely to rock the Euro (EUR) against the US Dollar (USD).
After standing pat on interest rates in July, the ECB is widely expected to reduce key rates by 25 basis points (bps) at its September policy meeting. The interest rates on the main refinancing operations, the marginal lending facility, and the deposit facility will likely be lowered to 4.0%, 4.25%, and 3.50%, respectively.
In June’s post-policy meeting press conference, ECB President Christine Lagarde said that "we are determined not to have a predetermined rate path. September decision is wide open." "September projections, plus other data, will be taken into account,” Lagarde added.
The accounts of the July ECB meeting showed that September “was widely seen as a good time to re-evaluate” the level of monetary policy restriction.
Since the July meeting, the Eurozone inflation cooled off significantly, returning closer to the central bank’s 2.0% target.
Eurostat's preliminary data showed on August 30 that the Harmonised Index Of Consumer Prices (HICP) across the currency bloc rose 2.2% over the year in August, marking the lowest annual inflation rate since July 2021. Meanwhile, the Euro area negotiated wages increased at an annual pace of 3.55% in Q2 2024 after rising 4.74% in the first quarter of this year.
The ECB accounts combined with a sharp decline in the pace of wage growth, cooling inflation and weakening Euro area business activity indicate that a rate reduction is a given on Thursday.
Therefore, the ECB’s communication on the path forward and its outlook on inflation and growth will hold the key for the market’s pricing of the future rate cuts and the Euro’s (EUR) next directional move.
Previewing the ECB meeting, TD Securities analysts said: “A 25bps cut is a near-certainty. What matters will be guidance beyond September, where there's strong pressure on both sides. Wage growth and services inflation remain strong (emboldening the hawks), while growth indicators are flagging softer (emboldening the doves).” “Lagarde is unlikely to rule out an October cut, but quarterly cuts are likely more consistent with the new projections,” the analysts added.
Heading into the ECB showdown, the Euro is clinging to recovery gains, with EUR/USD reversing from monthly lows of 1.1020. The pair’s fate hinges 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 certain response on the next rate cut move. Unless the policy statement, or Lagarde, hints at more rate reduction coming in the final quarter of this year, the EUR/USD recovery is seen gathering further traction.
Conversely, the Euro could come under renewed selling pressure if the staff projections show downward revisions to both the inflation and economic growth outlook. Meanwhile, Lagarde’s increased confidence in the disinflation progress could also revive Euro sellers. These factors could double down on the dovish expectations, fuelling the resumption of the recent EUR/USD downtrend.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD:
“EUR/USD maintains its bearish streak, especially after the Relative Strength Index (RSI) indicator returned below the 50 level on the daily chart. If sellers flex their muscles, the immediate support of the 50-day SMA at 1.0964 will be tested. Further south, the pair could aim for the strong demand area 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 closing basis to sustain the recovery toward the September 6 high of 1.1155, above which the 1.1200 psychological level will challenge bearish commitments.”
One of the European Central Bank's three key interest rates, the rate on the deposit facility, is the rate at which banks earn interest when they deposit funds with the ECB. It is announced by the European Central Bank at each of its eight scheduled annual meetings.
Read more.Next release: Thu Sep 12, 2024 12:15
Frequency: Irregular
Consensus: 3.5%
Previous: 3.75%
Source: European Central Bank
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.