ECB Preview: Rate Decision Could Be Euro’s Game Changer

The European Central Bank is going to announce its monetary policy decision on Thursday. Policymakers, led by President Christine Lagarde, are expected to finally abandon their cautious approach to quantitative tightening.

Europe’s CPI reading reached record highs, so, the European central bank will have to decide another 75 bps rate hike as the Deposit Facility rate now stands at 0.75%, and the Main Refinancing Rate at 1.25%.

President Lagarde’s cautious approach to monetary policy has become history when the ECB started the tightening cycle in July, when the central bank hiked its main benchmark rates by 50 bps, followed by one 75 bps hike in September.at that time, Lagarde warned it could be a one-off, initially supported by European policymakers noting that large rate hikes would not be the norm in the short term.

Hot Inflation, Sluggish Growth

Pressures on the main sources of inflation, energy and food, have not eased. The energy crisis triggered by Moscow’s invasion of Ukraine has pushed the CPI to a record high of 10.9% YoY in September 2022, with food prices rising even higher amid increased fuel and plastic costs.

The Western world has massively sanctioned Russia by cutting off imports, with the latter interrupting gas provisions to Europe. That resulted in skyrocketing energy prices and a boost for the already high CPI.

The ECB stated in September that it “expects to raise interest rates further because inflation remains far too high and is likely to stay above target for an extended period.” Policymakers significantly revised up their inflation projections and inflation is now expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024.

The Eurozone encounters substantial slowdown in economic growth and the central bank downwardly revised its growth figures, with the economy seen expanding by 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024. That means that European policymakers are trapped between a rock and a hard place. Rising inflation coupled with an economic downturn and spiced with aggressive rate hikes is a burden for households and businesses that so far, has only been worsening.

The EUR/USD pair is on the loose ahead of the release amid an American Dollar sell-off. The pair trades above parity after plummeting to a multi-decade low of 0.9535 earlier in October, as opposed to the ECB, the US Federal Reserve is foreseen slowing the pace of tightening after hiking rates by another 75 bps in November.

If the ECB delivers a modest 50 bps rate hike, EUR will fall back below the 1.0000 threshold, with a critical support level at a daily descendant trend line coming from this year’s high at 1.1494, now in the 0.9940 price zone.

ECB practically needs to hike by 75 bps and deliver a hawkish message to provide an additional boost to the pair that could send it beyond 1.0100/20 in the near term. September monthly high comes at 1.0197, an unlikely level to reach post-ECB. Nevertheless, an extension beyond it in the upcoming days should further confirm the end of the bearish trend.