ECB Press Conference: President Lagarde speaks on policy outlook after 25 bps hike

Christine Lagarde, President of the European Central Bank (ECB), explains the decision to raise key rates by 25 basis points in July and responds to questions from the press.

ECB press conference key quotes

"The near-term outlook has deteriorated."

"Manufacturing held down by weak external demand."

"Services is more resilient but momentum slowing."

"The labour market remains robust."

"Domestic price pressures are becoming important drivers of inflation."

"Some long-term inflation indicators remain elevated; they need to be monitored closely."

"Economic and inflation outlook remain highly uncertain."

"Food and energy prices are potential upside risks to inflation."

"Starting to see transmission of policy to economy."

"Wage increases are definitely playing a role in driving inflation."

"The key instrument in the current circumstance is the interest rate."

"There is a possibility of a hike or a pause, it's a maybe."

"Do we have more ground to cover? At this point I wouldn't say so."

"Not seeing signs of strengthening second round effects."

"We have not discussed a balance sheet cut."

About ECB's press conference

Following the ECB´s monetary policy decisions, the ECB President delivers a prepared statement and responds to questions from the press on the policy outlook. Her comments may influence the volatility of EUR and determine a short-term positive or negative trend. Her hawkish view is considered as positive, or bullish for the EUR, whereas her dovish view is considered as negative, or bearish.

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This section below was published at 12:15 GMT to cover the European Central Bank's policy announcements and the initial market reaction.

The European Central Bank announced that it raised key rates by 25 basis points (bps) following the July policy meeting, as widely expected. With this decision, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 4.25%, 4.5% and 3.75%, respectively.

Follow our live coverage of the market reaction to ECB policy decisions.

In its policy statement, the ECB reiterated that future decisions will ensure that rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to 2% medium-term target.

Key takeaways from the policy statement

"In particular, interest rate decisions will continue to be based on its assessment of inflation outlook in light of incoming economic and financial data, dynamics of underlying inflation, and strength of monetary policy transmission."

"ECB also decided to set remuneration of minimum reserves at 0%."

"This decision will preserve effectiveness of monetary policy by maintaining current degree of control over monetary policy stance and ensuring full pass-through of interest rate decisions to money markets."

"At the same time, it will improve efficiency of monetary policy by reducing overall amount of interest that needs to be paid on reserves in order to implement appropriate stance."

"ECB intends to reinvest principal payments from maturing securities purchased under programme until at least end of 2024."

Market reaction

The Euro came under modest selling pressure with the initial reaction to the ECB's policy announcements. As of writing, the EUR/USD pair was trading near 1.1100, where it was still up 0.25% on a daily basis.

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This section below was published at 07:00 GMT as a preview of the European Central Bank (ECB) policy announcements.

• European Central Bank is set to deliver another 25 bps rate hike on Thursday.
• Lagarde could fan expectations of a September rate hike pause.
• The ECB decision and Lagarde’s presser likely to ramp up volatility around the Euro.

European Central Bank (ECB) is expected to keep up the rate hike path when it meets on July 27, Thursday, to decide on its monetary policy. EUR/USD is flirting with 1.1100 after reaching its highest level in 17 months above 1.1200 last week, as we progress toward the ECB policy announcements.

There are no updated staff projections due for publication following the July meeting but ECB President Christine Lagarde will address the usual post-meeting news conference at 12:45 GMT.

European Central Bank interest rate decision: What to know in markets on Thursday, July 27

• EUR/USD is holding gains above 1.1100, as the US Dollar (USD) nurses losses induced by the US Federal Reserve’s (Fed) dovish rate outlook. 
• The Fed raised rates by the widely expected 25 basis points (bps) to a 22-year high of 5.25%-5.50% and left doors open for more tightening without committing to the timing of the next lift-off. 
• Powell refrained from providing any forward guidance, emphasizing a ‘data-dependent’ and ‘meeting-by-meeting’ approach.
• US S&P 500 futures capitalize on risk flows while the benchmark 10-year US Treasury bond yield holds lower ground near 3.85%.
• On Tuesday, Germany’s IFO Business Climate Index declined to 87.3 in July versus last month's 88.6 and the consensus forecast of 88.0. the Institute’s Economist Klaus Wohlrabe said that the “German GDP likely to shrink in the 3rd quarter.”
• US Conference Board's Consumer Confidence Index rose to 117.0 from 110.1 (revised from 109.7) in June. The gauge showed the continued improvement in the US consumer sentiment in July.
• The ECB event will likely provide short-term direction in the EUR/USD pair while the markets will seek fresh trading incentives from the US advance Q2 GDP and Jobless Claims data.

ECB interest rates expectations and implications for EUR/USD

European Central Bank is likely to increase interest rates by 25 basis points (bps) on Thursday at 12:15 GMT, raising the Deposit Rate from 3.50% to 3.75%. Such a rate hike is fully baked in, with probability standing at roughly 97%. The central bank delivered a 25 bps rate hike in June, slowing down its pace of increase amid mounting recession fears.

Early July, President Lagarde said in an interview with La Provence, “we still have work to do to bring inflation back down to our target.” “We need to bring rates into “sufficiently restrictive” territory to lock in our policy tightening, she mentioned in her introductory speech at the ECB Forum on Central Banking, in Sintra, last month.

Meanwhile, at the July post-meeting press conference, Lagarde argued, "Are we done? Have we finished the journey? No. We're not at our destination. Do we still have ground to cover? Yes, we still have ground to cover.”

Lagarde stuck to her hawkish rhetoric that the ECB remains committed to bringing down inflation to its 2.0% target, and thus, justifying the expected 25 bps rate hike this month.

Heading into the critical ECB decision, Eurozone Harmonised Index of Consumer Prices (HICP) inflation stands at 5.5% in June, sharply down from May’s 6.1% increase. The bloc’s Core HICP showed a softer-than-expected increase of 5.4% YoY in June, compared with forecasts of a 5.5% clip.

Soft Eurozone inflation data prompted several ECB policymakers to push back against expectations of another rate increase in September. It was the dovish remarks from a notable hawk, Governing Council member Klaas Knot, last week that paused the ongoing uptrend in the EUR/USD pair. Knot said rate hikes beyond July are likely but not certain.” His colleague Ignazio Visco noted that “inflation may drop more quickly than forecast.”

When asked in an interview with CGTN Europe, what would argue in favor of ending the rate increases rather than going further, ECB policymaker Yannis Stournaras said, "the argument that inflation is falling and we have found out that we are at the optimal point that further increases of interest rates might damage the economy."

The recent dovish shift in the ECB communication suggests that the Bank’s cues on the interest rates path in September are expected to be of utmost importance for the next direction in the Euro, eventually impacting the EUR/USD valuations.  

Further, the dovish ECB expectations are justified by the disappointing Eurozone and German preliminary Manufacturing and Services PMIs for July, which added credence to the view that the bloc is heading for a recession. 

The Euro could see a sharp correction on Lagarde’s dovish signals on a probable rate hike pause after July, smashing the EUR/USD pair toward 1.1000. Conversely, the main currency pair could scale new peaks beyond 1.1300 if the policy guidance reads hawkish and indicates another rate hike in September.

Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “EUR/USD is trading on the front foot ahead of the key ECB event. The 14-day Relative Strength Index (RSI) is sitting above the 50 level, keeping the bullish potential intact for Euro buyers.”

Outlining important technical levels to trade the EUR/USD pair, Dhwani notes: “On the upside, EUR/USD buyers need to resist above the 1.1100 barrier on a sustained basis to take out the static resistance near 1.1150. Euro buyers will then target a  break above the 1.1200 round level. Alternatively, the bullish 21-Daily Moving Average (DMA) at 1.1051 will offer strong support to the pair, below which a sharp sell-off toward the 1.1000 psychological mark cannot be ruled out. The July 11 low of 1.0977 will be the next relevant downside cushion.”