At the October meeting, the ECB Meeting decided not to change interest rates after previously experiencing an increase of 450 basis points in less than two years. On Thursday, December 14, at 13:15 GMT, the ECB will announce its decision, followed by a press conference by President Christine Lagarde at 13:45 GMT. Additionally, the ECB will release its latest economic projections from its staff.

Although the market expects the ECB to keep interest rates unchanged, they also believe that the tightening cycle has ended, and interest rate cuts may occur in the first half of next year.

ECB Interest Rate Decision: Market Highlights on Thursday

  1. Federal Reserve officials predict three interest rate cuts next year, pushing EUR/USD up to 1.0900 after the FOMC meeting, amid declining yields on the US Dollar and Treasury.
  2. US 10-year Treasury yields fell to 4% due to Fed policy, while the S&P 500 reached a two-year high and the Dow Jones recorded a record close.
  3. Industrial Production in the Eurozone fell by 0.7% in October, worse than the expected decline of 0.3%, with an annual decrease of 6.6%.
  4. On Friday, the Composite Purchasing Managers’ Index (PMI) for the Eurozone in early December was released, expected to rise slightly from 47.6 to 48.
  5. The ECB event could impact the EUR/USD pair, especially in the context of expectations regarding central bank actions in the first quarter of 2024.
Anticipation of the ECB Meeting and Its Impact on EUR/USD

Widespread expectations from economists indicate that the European Central Bank (ECB) will announce a policy pause on Thursday, maintaining the key refinancing operation rate, marginal lending facility, and deposit facility at 4.50%, 4.75%, and 4.00%, respectively. After the policy changes by the Federal Reserve during the December FOMC meeting, the question is whether the ECB will definitively shift to a dovish stance.

Since the October meeting, inflation in the Eurozone has continued to weaken, experiencing a decrease of 0.5% in November, with an annual rate of 2.4%, the lowest level since July 2021. Core inflation, which excludes energy and food, slowed to 3.6%, the lowest since April 2022.

Economically, Gross Domestic Product stagnated during the third quarter, and recent reports indicate a lack of significant improvement, particularly with a decline in Industrial Production of 0.7% in October.

With the combination of weakening inflation and poor economic prospects, it is expected that the ECB will not tighten monetary policy at this year's final meeting. The market anticipates interest rate cuts next year, even considering a cut during the April 2024 meeting. While President Lagarde may attempt to balance the dovish narrative, dismal economic reports and worsening growth prospects could pose challenges.

Discussions within the Governing Council are expected to focus on adjusting the Pandemic Emergency Purchase Programme (PEPP) and the Minimum Reserve Requirement, although analysts do not expect any decisions to be made at this meeting. Other debated topics include the reinvestment of proceeds from maturing securities.

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The ECB is anticipated to remain cautious and refrain from declaring victory over inflation. Lagarde may reiterate the emphasis on "high for a long time" interest rates and assert that the market pricing scenario is not the ECB's baseline scenario. More dovish comments could potentially trigger a significant drop in the Euro.

The ECB will release macroeconomic staff projections for the Eurozone, with expected downward revisions for inflation and growth. However, these revisions are believed to be moderate to avoid significant changes in Lagarde's narrative that could trigger market easing expectations.

The general expectation is a suspension with no other policy changes, reflecting the ECB's recent speeches acknowledging constructive inflation dynamics and weak growth. In response, the market is likely to have limited impact if the ECB meets these expectations.

The EUR/USD pair has experienced a bearish correction after reaching peaks above 1.1000 at the end of November. Despite facing resistance at 1.0970 and 1.1000, the weakening US Dollar supports a bullish outlook. Meanwhile, technical support at 1.0825 and critical levels at 1.0730 determine the price movement direction, with potential further declines if breached.

If the ECB and Lagarde do not provide surprises regarding interest rates and narrative, the impact will be limited, and market attention will shift to the next meeting on January 15, 2024. Any potential hawkish surprises could strengthen the Euro close to 1.1000, but market balance may quickly change as attention returns to economic prospects.