ECB lifts key rates by 25 bps, Lagarde opens door to July hike

European Central Bank (ECB) President Christine Lagarde said that it was very likely for them to continue to raise rates in July while responding to questions in the post-meeting news conference.

"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 explained. "Bearing a material change to our baseline, it is very likely the case that we will continue to raise rates in July, which probably doesn't come as a surprise. This is because we are determined to reach our target in a timely manner."

Regarding the inflation outlook, "under the current parameters 2.2% in 2025 is not satisfactory and it's not timely," Lagarde said. "Which is why we're making the decisions that we are making today."

Market reaction

EUR/USD gathered bullish momentum following these comments and climbed to a monthly high near 1.0900 on Thursday.

The ECB announced that it raised key rates by 25 basis points (bps) following the June policy meeting. 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%, 4.25% and 3.5%, respectively.

According to revised macroeconomic projections, Eurosystem staff expect headline inflation to average 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. "Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and implications of robust labour market for speed of disinflation," the ECB noted in its press release.

Key takeaways from the policy statement

"Staff have slightly lowered their economic growth projections for this year and next year."

"Staff expect economy to grow by 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025."

"ECB's future decisions will ensure that interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to 2% medium-term target and will be kept at those levels for as long as necessary."

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

"Will discontinue reinvestments under APP as of July 2023."

"The decline will amount to €15 billion per month on average until end of June 2023."

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

 

 

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• European Central Bank is widely expected to raise key rates by 25 bps on Thursday.
• Will the ECB hint at a potential September rate hike pause?
• Euro braces for wild action on the ECB decision and President Lagarde’s presser.

European Central Bank (ECB) is set to announce another rate hike on June 15, Wednesday, having slowed down its pace of tightening in the previous meeting. The policy statement will be accompanied by the staff economic projections, followed by the press conference.

ECB President Christine Lagarde will helm the presser and her words will be closely scrutinized for the central bank’s future interest rates path. In the lead-up to the ECB policy announcements, EUR/USD is heading back toward monthly highs above the 1.0800 level.

European Central Bank interest rate decision: What to know in markets on Thursday, June 15

• EUR/USD is recovering ground above 1.0800, as the US Dollar (USD) pulls back following a jolt overnight from the hawkishness surrounding the Fed's pause.
• The Fed left the rates unchanged at 5.0%-5.25%, as widely expected at its June meeting but the Dot Plot chart projected two more 25 bps rate hikes ahead.
• Fed Chair Jerome Powell said: “We are not done yet. The Fed will continue to watch how the labor market moves for insights that can then help the central bank decide how to move interest rates going forward.”
• US S&P 500 futures trade modestly flat and the benchmark 10-year US Treasury bond yields cling to the previous gains near 3.85%.
• The People’s Bank of China (PBOC) cut one-year policy rate after lowering short-term rates. China’s economic recovery weakened in May as growth in industrial output and retail sales slowed, the latest data from the National Bureau of Statistics (NBS) showed early Thursday.
• On Tuesday, the Bureau of Labor Statistics (BLS) reported the United States Consumer Price Index (CPI), which increased just 0.1% for the month, bringing the annual inflation level down sharply to 4.0% from 4.9% in April. Meanwhile, the Core CPI rose 0.4% on the month and was still up 5.3% from a year ago, with both measures meeting the consensus forecasts.
• The ECB event will likely drive EUR/USD’s action while the US Jobless Claims and Retail Sales data could play second fiddle.

When will be the ECB meeting and how could it affect EUR/USD?

European Central Bank interest rates decision will be announced at 12:15 GMT, followed by Lagarde’s presser at 12:45 GMT. Money markets are pricing a 95% probability of the central bank raising the key interest rates by 25 basis points (bps) on Thursday, lifting the benchmark Deposit Rate from 3.25% to 3.50%.

At its May meeting, the ECB delivered a 25 bps rate hike, downsizing from the 50 bps rate hike announced in March. At the post-monetary policy meeting press conference, ECB President Christine Lagarde said, “based on the information we have today, we have more ground to cover, and we are not pausing. It’s extremely clear.” Lagarde later added, “This is a journey. We have not arrived yet.”

Since the May meeting, the Eurozone economic performance has been quite mixed but enough to hint at another ECB rate hike. Eurozone inflation declined sharply, with the annual Harmonised Index of Consumer Prices (HICP) rising 6.1% in May vs. April’s 7.0% increase, the latest data published by Eurostat revealed. The Core HICP inflation dropped to 5.3% YoY in May as against the expected 5.5% clip, down from the 5.6% figure booked in April.

Following the inflation data and while speaking at the Hearing before the Committee on Economic and Monetary Affairs (ECON) of the European Parliament in Brussels, ECB Chief Lagarde reiterated that “underlying inflationary pressures remain high,” adding that there is "no clear evidence that underlying inflation has peaked."

Meanwhile, the bloc entered a technical recession at the start of the year after Eurostat cut its earlier estimate of 0% growth in the final quarter of 2022 and 0.1% growth in the first quarter of 2023 to 0.1% contractions in both periods.

Against mounting economic concerns, economists expect one more 25 bps rate hike in July following June’s, adding that “the deposit rate is expected to remain at 3.75% for nearly a year to ensure inflation retreats sustainably,” the Bloomberg survey revealed.

Therefore, the Euro’s fate hinges on the European Central Bank’s (ECB) inflation and growth projections, with a 25 bps rate hike fully baked in. Further, President Lagarde’s outlook on the interest rates will be also critical to EUR/USD’s next directional move.

The Euro is likely to come under intense selling pressure should Lagarde hint at pausing rate hikes after July, which could knock down the EUR/USD pair toward 1.0700. On the other hand, the main currency pair could recapture 1.0850 and beyond if Lagarde sticks to the central bank’s commitment to bringing inflation back toward the 2.0% target. At the moment, inflation in the old continent is more than thrice the Bank’s target.

Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “Despite the pullback from monthly highs, EUR/USD managed to settle Wednesday above the 100-Day Moving Average (DMA) support at 1.0805, where it now wavers. The 14-day Relative Strength Index (RSI) has turned lower but remains above the 50 level, keeping Euro buyers hopeful ahead of the ECB decision.”

Dhwani also outlines important technical levels to trade the EUR/USD pair: “On the upside, EUR/USD buyers need to take out the flattish 50 DMA barrier at 1.0875 on a sustained basis to confirm a bullish reversal from two-month troughs near 1.0635. The next relevant resistance is seen at the 1.0900 threshold.” 

European Central Bank related content

• ECB Preview: Three scenarios and their implications for EUR/USD – TDS
• Euro appears optimistic north of 1.0800 ahead of ECB event
• EUR/GBP could move closer to the 0.8500 key support after ECB decision – ING