European Central Bank Interest Rate Decision: All Eyes On ECB After Fed Hawkish Pause

European Central Bank (ECB) is set to announce another rate hike on June 15, Wednesday, having slowed down its pace of tightening in the previous meeting. The policy statement will accompany the staff economic projections, followed by the press conference.

ECB President Christine Lagarde will helm the presser, and her words will be closely scrutinized for the central bank’s future interest rates path. In the lead-up to the ECB policy announcements, EUR/USD is heading back toward monthly highs above the 1.0800 level.

European Central Bank Interest Rate Decision: What To Know In Markets On Thursday, June 15

  • EUR/USD is recovering above 1.0800 as the US Dollar (USD) pulls back following a jolt overnight from the hawkishness surrounding the Fed’s pause.
  • The Fed left the rates unchanged at 5.0%-5.25%, as widely expected at its June meeting, but the Dot Plot chart projected two more 25 bps rate hikes ahead.
  • Fed Chair Jerome Powell said: “We are not done yet. The Fed will continue to watch how the labor market moves for insights to help the central bank decide how to move interest rates forward.”
  • US S&P 500 futures trade modestly flat, and the benchmark 10-year US Treasury bond yields cling to the previous gains near 3.85%.
  • The People’s Bank of China (PBOC) cut a one-year policy rate after lowering short-term rates. China’s economic recovery weakened in May as growth in industrial output and retail sales slowed, the latest data from the National Bureau of Statistics (NBS) showed early Thursday.
  • On Tuesday, the Bureau of Labor Statistics (BLS) reported the United States Consumer Price Index (CPI), which increased just 0.1% for the month, bringing the annual inflation level down sharply to 4.0% from 4.9% in April. Meanwhile, the Core CPI rose 0.4% on the month and was still up 5.3% from a year ago, with both measures meeting the consensus forecasts.
  • The ECB event will likely drive EUR/USD’s action, while the US Jobless Claims and Retail Sales data could play second fiddle.

When Will Be The ECB Meeting And How Could It Affect EUR/USD?

European Central Bank interest rates decision will be announced at 12:15 GMT, followed by Lagarde’s presser at 12:45 GMT. Money markets are pricing a 95% probability of the central bank raising the key interest rates by 25 basis points (bps) on Thursday, lifting the benchmark Deposit Rate from 3.25% to 3.50%.

At its May meeting, the ECB delivered a 25 bps rate hike, downsizing from the 50 bps rate hike announced in March. At the post-monetary policy meeting press conference, ECB President Christine Lagarde said, “Based on the information we have today, we have more ground to cover, and we are not pausing. It’s obvious.” Lagarde later added, “This is a journey. We have not arrived yet.”

Since the May meeting, the Eurozone economic performance has been mixed, but enough to hint at another ECB rate hike. Eurozone inflation declined sharply, with the annual Harmonised Index of Consumer Prices (HICP) rising 6.1% in May vs. April’s 7.0% increase, the latest data published by Eurostat revealed. The Core HICP inflation dropped to 5.3% YoY in May against the expected 5.5% clip, down from the 5.6% figure booked in April.

Following the inflation data and while speaking at the Hearing before the Committee on Economic and Monetary Affairs (ECON) of the European Parliament in Brussels, ECB Chief Lagarde reiterated that “underlying inflationary pressures remain high,” adding that there is “no clear evidence that underlying inflation has peaked.”

Meanwhile, the bloc entered a technical recession at the start of the year after Eurostat cut its earlier estimate of 0% growth in the final quarter of 2022 and 0.1% growth in the first quarter of 2023 to 0.1% contractions in both periods.

Against mounting economic concerns, economists expect a 25 bps rate hike in July following June, adding that “the deposit rate is expected to remain at 3.75% for nearly a year to ensure inflation retreats sustainably,” the Bloomberg survey revealed.

Therefore, the Euro’s fate hinges on the European Central Bank’s (ECB) inflation and growth projections, with a 25 bps rate hike fully baked in. Further, President Lagarde’s outlook on the interest rates will also be critical to EUR/USD’s next directional move.

The Euro will likely come under intense selling pressure should Lagarde hint at pausing rate hikes after July, which could knock down the EUR/USD pair toward 1.0700. On the other hand, the main currency pair could recapture 1.0850 and beyond if Lagarde sticks to the central bank’s commitment to bringing inflation back toward the 2.0% target. Currently, inflation in the old continent is more than thrice the bank’s target.

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