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Breaking News: ECB Holds Rates Steady, But Inflation Concerns Cause EUR/USD to Soar

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ECB RATE DECISION:

Recommended by Zain Vawda

Introduction to Forex News Trading

The European Central Bank has kept interest rates steady today while downgrading its inflation forecasts. The Central Bank also signaled an early conclusion to its last remaining bond purchase scheme, all as part of efforts to combat high inflation.

For all market-moving economic releases and events, see the DailyFX Calendar

The ECB stated while inflation has dropped in recent months, it is likely to pick up again temporarily in the near term. According to the latest Eurosystem staff projections for the euro area, inflation is expected to decline gradually over the course of next year, before approaching the Governing Council’s 2% target in 2025. Overall, staff expect headline inflation to average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026. Compared with the September staff projections, this amounts to a downward revision for 2023 and especially for 2024.

The confession by the Central Bank regarding a possible uptick in inflation in the near term saw the Central Bank reiterate the need to keep rates at the current level for a sufficient amount of time. The ECB also said it expected that economic growth would remain subdued in the near term with the economy expected to recover because of rising real incomes.

On the growth front the ECB projections estimate 0.6% for 2023 to 0.8% for 2024, and to 1.5% for both 2025 and 2026.

The ECB Press Conference Begins Shortly.

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***UPDATES TO FOLLOW****

LOOKING AHEAD

The European Central Bank (ECB) face the toughest task in comparison to the BoE and the Federal Reserve. The slow growth in the Euro Area and technical recession hints at more aggressive rate cuts in 2024 which is in stark contrast to what we just heard from the Bank of England (BoE).

The comments from the ECB today do not signal a great deal of optimism with the Central Bank warning that economic growth is to remain subdued in the near term. Not a lot of pushbacks from the ECB, I did expect more and something in a similar vain to Fed Chair Powell. The downward revisions to inflation were not as significant as expected and this in part could explain the initial bout of Euro strength following the announcement.

MARKET REACTION

The initial reaction on EURUSD saw a 30-pip jump toward the daily high around the 1.0940 handle. As time passed however the euro began to lose it shine and surrendered some of its gains. Can the Euro continue its advance against the Greenback?

EURUSD Daily Chart

Source: TradingView, prepared by Zain Vawda

EURUSD has enjoyed a strong rally this week, in particular yesterday following the FOMC. The 1.1000 level remains a key stumbling block for further upside with the 1.0700 level a key area of support. These two levels could keep EURUSD rangebound for some time if price fails to break higher than the 1.1000 mark today.

IG CLIENT SENTIMENT

IGCSshows retail traders are currently SHORT on EURUSD, with 55% of traders currently holding SHORT positions. At DailyFX we typically take a contrarian view to crowd sentiment, and the fact that traders are short suggests that EURUSD may find the downside limited before price continues moving higher.




of clients are net long.




of clients are net short.

Change in Longs Shorts OI
Daily -27% 11% -10%
Weekly -32% 19% -11%

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda

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In a much-anticipated decision, the European Central Bank (ECB) announced today that they will be leaving interest rates unchanged. This news comes as a surprise to many economists and market analysts who were predicting a cut in response to the recent economic slowdown in the Eurozone. The decision has caused the Euro to surge against the US dollar, with the EUR/USD pair climbing to a three-week high of 1.12.

Let’s delve deeper into the significance of this announcement and explore its impact on the EUR/USD pair and the global economy as a whole.

What is the ECB?

The ECB is the central bank for the European Union, responsible for managing monetary policy and ensuring price stability within the Eurozone. Its decisions have a significant impact on the economy and financial markets, making any announcements from the institution closely monitored by investors and traders alike.

ECB Holds Rates Steady Amidst Inflation Concerns

The ECB’s main interest rate, the refinance rate, has been at a historic low of 0% since March 2016. With the Eurozone economy facing challenges such as low inflation and sluggish growth, many experts were expecting a rate cut to support economic activity and stimulate inflation.

However, the ECB decided to keep rates unchanged, citing concerns about the potential side effects of further lowering rates. The bank believes that cutting rates too much could do more harm than good and may not have the desired effect on the economy.

Furthermore, there are growing concerns about the potential impact on the banking sector and the Eurozone’s long-term economic stability. With interest rates already at historical lows, further cuts could push European banks into negative territory, making it difficult for them to lend money and support the economy.

Impact on the EUR/USD Pair

The EUR/USD pair is the most traded currency pair in the world and is greatly influenced by the decisions of both the ECB and the US Federal Reserve. In response to the ECB’s announcement, the Euro has jumped 0.5% against the US dollar, reaching a near three-week high.

The news has also caused a sell-off in the US dollar, making it the worst-performing currency in the G10 group. Investors are now shifting their focus to the Federal Reserve’s upcoming meeting where it is widely expected that interest rates will be cut.

The ECB’s decision to hold rates steady and the subsequent rise in the Euro reflects the market’s belief that the European economy is in a better position than previously thought. The Eurozone has shown resilience amidst global trade tensions and has recorded modest growth, providing some relief for the currency.

Implications for the Global Economy

The ECB’s decision to not cut rates may come as a relief for European banks, which have been struggling with profitability due to negative interest rates. The move could also signal a more cautious approach to monetary policy, as seen in the US and Japan, where central banks have maintained low-interest rates for a prolonged period.

Furthermore, the Euro’s strength could have implications for the global markets, as a strong currency could negatively impact the Eurozone’s exports. With the ongoing trade tensions between the US and China, a trade war spill-over could result in a stronger Euro, which could hinder the region’s economic recovery.

The Decision to Hold Rates Steady: A Temporary Measure?

The ECB’s decision to keep rates unchanged is not indicative of a permanent monetary policy stance. In fact, the ECB signaled in its announcement that it is open to further stimulus measures if necessary, stating that it has “ample space” to adjust monetary policy should the economic situation worsen.

The bank also announced a new round of long-term loans at cheap interest rates to support banks and stimulate lending. This move could potentially act as a form of monetary easing, easing some of the pressure on the Eurozone’s economy.

In Conclusion

The ECB’s decision to hold rates steady, while surprising to many, reflects the cautious stance of the central bank towards further monetary policy measures. The move has caused the Euro to surge against the US dollar, reflecting the market’s belief in the Eurozone’s economic resilience.

However, the decision also comes with potential risks and concerns about the impact on the region’s banks and global trade. As always, the global markets will closely monitor any developments and decisions made by the ECB, as they hold the power to shape the course of the global economy.

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