EUR/USD up on the day after conclusion of ECB policy meeting

The European Central Bank votes to keep interest rates unchanged on Thursday.
ECB staff projections forecast lower growth and inflation going forward.
ECB’s Lagarde does not deviate much from market expectations in press conference.

EUR/USD is trading slightly up on the day, pushing above 1.09 after the European Central Bank (ECB) policy announcement on Thursday. The ECB voted to keep its key Main Refinancing Operations Rate unchanged at 4.5%, its Rate on Deposit Facility at 4.0% and the Marginal Lending Facility at 4.75%.

The ECB revised staff projections to forecast lower growth and inflation in the future, with inflation averaging 2.3% in 2024 and growth 0.6%. This is down from the previous forecast of 2.7% inflation and 0.8% growth. The revisions prompted a slight sell-off in EUR/USD immediately after the announcement.

The Euro bounced back into positive territory, however, after the European Central Bank President Christine Lagarde's press conference as she more or less echoed market expectations. The market has priced in a rate cut in June and Lagarde earmarked the June meeting as a pivotal moment when the ECB would take stock of the incoming data and make a decision.

Euro recovers after Lagarde says rate cuts were "not discussed"

Lagarde's admission that "We have not discussed rate cuts at this meeting," and her comments about future decisions not being dependent on "a single data point" probably tamed enthusiasm for the ECB engaging in an early rate cut. This will have provided the EUR/USD with support since maintaining interest rates at their relatively high current level is beneficial for the Euro as it attracts more foreign capital inflows.

Analysts from ING bank had predicted the ECB President would provide more detail on the conditions necessary for a rate cut, and in this regard Lagarde did say the ECB would be paying especially close attention to "wages and profits."

February inflation data for the Eurozone showed a decline to 2.6% from 2.8%. This is not far from the ECB’s 2.0% target, however, core inflation remains sticky at 3.1%, notes FXStreet’s Yohay Elam in his preview, suggesting persistent base effects will act as a restraint on the ECB. At the same time, flatlining growth in the region is a compelling counter-reason for the ECB to lower interest rates.

On the Horizon

The next big macroeconomic event for the EUR/USD is US Nonfarm Payroll data out on Friday at 13:30 GMT. If the jobs data is soft, in line with the ADP and JOLTS Job Openings data from earlier in the week, it could weigh on the USD and give EUR/USD another boost.

Also on Friday is the final estimate of Eurozone GDP data out at 10:00 GMT, with no-change in the run of sclerotic growth foreseen for the fourth quarter. If the revision tips into negative territory it will make the argument for a rate cut sooner all the more compelling, weighing on EUR/USD.

Technical Analysis: Euro’s slow ascent continues

Turning to the charts, the EUR/USD continues its laborious climb from February’s 1.06 base-camp lows. In the short term, the peaks and troughs are rising, suggesting a tentative uptrend is in progress that slightly favors bulls. The longer-term trend is sideways and difficult to forecast.

Euro vs US Dollar: 4-hour chart

The daily chart below shows buyers seem to have now successfully slain key resistance from the 50-day Simple Moving Average (SMA) at 1.0859 (orange line) and established a tentative foothold above. This is a bullish sign, reinforcing the validity of the short-term uptrend.

Euro vs US Dollar: 1-day chart

The next target to the upside now is the 61.8% Fibonacci retracement of the early 2024 decline, at 1.0972. A break above that level would further encourage confidence from bulls.

A break beneath the 1.0795 lows would spoil the buyer’s party and indicate a vulnerability to break down.

ECB FAQs

What is the ECB and how does it influence the Euro?

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.

What is Quantitative Easing (QE) and how does it affect the Euro?

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.

What is Quantitative tightening (QT) and how does it affect the Euro?

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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