Euro under presssure ahead of ECB meeting

• ECB expected to pause at today’s meeting

The euro continues to lose ground and has fallen over 1% since Monday. In the European session, EUR/USD is trading at 1.0545, down 0.19%.

Will the ECB take a pause?

It has been a long time coming, but barring a major surprise, the ECB will hold rates at today’s meeting. This would mark the first pause since the ECB began the current rate-tightening cycle in July 2022. The key deposit rate is currently at a record high of 4.0%.

At the previous meeting in September, the ECB raised rates by a quarter point. The policy statement signalled a “higher for longer” stance, stating that interest rates had reached levels, that if maintained sufficiently, would help push inflation back to the 2% target. At the same time, this was a strong hint that rates had peaked. The September rate hike was far from unanimous, with some Governing Council members urging a pause.

The markets have priced in a pause, based on two key factors. First, inflation in the eurozone and in Germany has fallen significantly since the September meeting. With bond yields in Europe and elsewhere climbing sharply, inflation could well continue to fall without the ECB hiking rates. Second, weak economic growth in the eurozone means that the risks of a recession are rising, and Germany is officially in a recession after two consecutive quarters of negative growth.

I would not be surprised if the ECB delivers a ‘hawkish pause’, with a message along these lines: Today’s pause was appropriate in the current economic conditions. Nevertheless, the battle against inflation is far from over and rate hikes remain on the table. If the ECB sends this kind of message at today’s meeting, the euro should be able to hold its own or even gain ground against the US dollar.

.

EUR/USD Technical

• EUR/USD tested resistance at 1.0648 earlier and is putting pressure on 1.0679
• 1.0574 and 1.0531 are providing support

dollar
inflation
markets
policy
interest rates
us dollar