ECB leaves rates on hold, EURUSD slides

Euro to dollar exchange rate, bond yields slide as ECB keeps rates unchanged

The European Central Bank (ECB) announced that it would keep interest rates unchanged at its meeting on Thursday, concluding a historic run of ten consecutive rate hikes that began in July 2022. The ECB’s widely-anticipated decision was announced as the eurozone faces the looming threat of a recession, coupled with increased uncertainty in the global economy.

On Thursday, the ECB announced that it would maintain its deposit rate at 4%, marking a record high for the institution established in 1998. ECB officials indicated that further rate increases might not be necessary, reiterating language that was initially used in their previous policy statement in September.

Despite looming inflationary risks from oil markets amid the Israel-Hamas war, the ECB’s Governing Council said recent information confirmed its medium-term outlook for inflation at 2.1%.

“Inflation is still expected to stay too high for too long, and domestic price pressures remain strong. At the same time, inflation dropped markedly in September, including due to strong base effects, and most measures of underlying inflation have continued to ease,” it said in a statement.

Following the ECB's policy statement, both the euro to dollar rate and eurozone bond yields saw a slight decline.

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Higher for longer: Lagarde says ECB “has to hold”

When asked how long rates need to stay at current levels, ECB President Christine Lagarde told CNBC:

“We refer to timely manner, sufficiently long. But in the same breath, I say we shall be data-dependent. At this point of our fight against inflation and after 10 successive hikes, now is not the time for forward guidance.”

The official said the topic of rate cuts was not on the table at the ECB’s Governing Council meeting.

“Even having a discussion on a cut is totally, totally premature. For the moment we are saying we are steady, we have to hold,” she said.

EU interest rates: “Higher for longer” — but for how long?

The ECB's choice aligns with the stance of major central banks across the globe, which are generally perceived to have either already reached the peak of their interest rates or to be on the verge of doing so. Notably, in September, the Bank of England, Swiss National Bank, and U.S. Federal Reserve all made the decision to maintain their existing interest rates.

In his morning notes on Thursday, Markets.com Chief Markets Analyst Neil Wilson said the key question for the ECB was now how long to keep interest rates elevated:

“The message from the ECB was clear – it believes it has done enough and the hiking cycle is over. And developments since are hardly conducive to more tightening, given the outlook for growth (PMIs at 3-year lows) and inflation – down to 4.3% in September from 5.2% in August. […]

Certainly, Lagarde made sure there is still a crack in the door for another hike, but it’s obvious that the [Governing Council] is fairly confident that it won’t or shouldn’t take it further. The question is now one of duration — how long do you maintain rates here? The [Governing Council] will be very cautious about leaning in early towards cuts”.

Euro forecast: ING says ECB hold “not a game-changing event”

As for the euro outlook, ING FX Strategist Francesco Pesole wrote that the ECB’s decision on Thursday would not be a “game-changing event for EUR/USD”:

“[…] there is some room for a hawkish surprise, but we would have some doubts – given the rate and growth differentials - that markets will have the appetite to chase EUR/USD rallies beyond 1.060/1.0630 for much longer after the ECB announcement. All in all, we don’t think this will be a game-changing event for EUR/USD.”

Shaun Osborne, Chief FX Strategist at Toronto-based Scotiabank, said that the EUR remains vulnerable to pressure “on supports at 1.0490 and 1.0520”, and identified the resistance level as 1.0595.

Some institutions, however, were extremely bearish on EURUSD. Major Wall Street investment banks J.P. Morgan and Citibank recently forecast the euro to dollar to reach parity by the end of the year due to oil-price-driven inflation and a potential economic slowdown triggered by the ECB’s monetary tightening policy.

At the time of writing, the euro to dollar rate was down 0.25% on the day, trading around the $1.0542 level, as per MarketWatch data. EUR has shed close to 4% of its value against the USD in the past three months.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.