Thursday’s ECB meeting ultimately left EUR/USD trading lower as traders questioned the near-term path for euro area rates. Policymakers were crystal clear about a 25-bps interest rate hike in July, but they failed to specify the size of the hike indicated for September. Based on the current assessment, the ECB anticipates a gradual but sustained path of further increases after the September meeting. In addition to today’s guidance on interest rates, the ECB announced an end to asset purchases from Jul. 1.
What’s clear from the decision and accompanying press conference is the ECB did not feel comfortable starting its tightening cycle with a 50 bps hike. When asked why, ECB President Lagarde stated that it was good practice to start with an incremental increase that is sizeable, not excessive, and indicates a path. That felt like central bank speak, for we’d prefer not to raise by 50 bps unless necessary.
President Lagarde also said a larger than 25 bps hike in September will depend on 2024 inflation projections being at or higher than 2.1%. She also indicated that the Governing Council did not discuss the neutral rate at this meeting but conceded that it had likely gone down. Whether that is a hint that rates won’t rise by 50 bps is unclear, nor did it indicate an unwillingness for the ECB to go above the neutral rate to tame inflation if necessary.
In today’s volatile markets, it isn’t easy to extrapolate too much from forex market movements. But EUR/USD’s reaction to today’s announcement suggests currency traders were expecting more from the ECB in terms of the outlook for interest rates or found the extra level of uncertainty around the future disconcerting. Otherwise, why would EUR/USD fall sharply below its pre-decision pivot price?
Looking ahead, it’s up to ECB speakers other than Lagarde to clarify the ECB’s position and potentially the EUR/USD’s direction.