ECB monetary policy decision – Overview

The European Central Bank (ECB) is scheduled to announce its monetary policy decision this Thursday at 11:45 GMT, which will be followed by the post-meeting press conference at 12:30 GMT. The ECB is all but certain to announce an end to its long-running asset purchase program and lay the groundwork for an interest rate hike in July. The bets for a more hawkish shift have gathered steam amid a continuous rise in the Eurozone inflation, which hit a record high in May. Hence, the focus will remain on ECB President Christine Lagarde's comments at the post-meeting press conference. Investors will look for clues about the size and pace of policy tightening, which should play a key role in influencing the near-term sentiment surrounding the shared currency.

Analysts at TD Securities (TDS) offered a brief overview of the key event and explained: “We expect the ECB to announce that the APP will end within weeks, and send a strong signal that rate hikes are coming in July and September. Forecasts will show stronger inflation and weaker growth, highlighting the ECB's challenge going forward. With the Euribor curve already reflecting the ECB's most likely scenario for tightening, scope for EUR/USD gains remain limited from here.”

How could it affect EUR/USD?

The markets have been pricing in more than 135 bps of cumulative interest rate hikes by the end of 2022, implying a jumbo 50 bps raise at one of the four meetings after June. This, in turn, suggests that the euro could weaken if ECB President Christine Lagarde sticks to her previous stance for 25 bps rake hikes in July and September.

According to Yohay Elam, Analyst at FXStreet: “Another scenario that cannot be ruled out is that Lagarde leaves the door open to 50 bps hikes, even as soon as July. Such an outcome could be the result of fresh forecasts compiled after the most recent inflation data. If Lagarde says such an option is on the cards and depends on data, the euro would have room to rise.”

Nevertheless, the central bank commentary should infuse a fresh bout of volatility around the euro crosses. Meanwhile,  Eren Sengezer, Editor at FXStreet, outlined important technical levels to trade the EUR/USD: “1.0680 (100-period SMA on the four-hour chart) aligns as interim support for EUR/USD ahead of 1.0660 (static level). In case the latter support fails on a dovish ECB tone, this could be seen as a bearish development and attract sellers. In that scenario, additional losses toward 1.0620 (Fibonacci 38.2% retracement of the latest uptrend) and 1.0600 (psychological level, 200-period SMA) could be witnessed.”

“On the upside, a four-hour close above 1.0760 (static level) on a hawkish ECB policy outlook could open the door for an extended rally toward 1.0780 (the end-point of the latest uptrend) and 1.0800 (psychological level),” Eren added further.

Key Notes

  •  ECB Preview: Buy the July rumor, sell the fact and three other scenarios for EUR/USD

  •  ECB Preview: Laying groundwork for rate hikes but EUR/USD could still fall

  •  EUR/USD Forecast: Euro defines levels for ECB-fueled breakout

About the ECB interest rate decision

ECB Interest Rate Decision is announced by the European Central Bank. Usually, if the ECB is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the EUR. Likewise, if the ECB has a dovish view on the European economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative, or bearish.

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