Will EUR/USD Hold Gains Above 1.10, With ECB Ending Up More Hawkish Than the FED?

Today we had three major central bank meetings, following yesterday’s dovish FOMC meeting, which sent the USD lower, after Powell accepted that rates will have to go down sooner rather than later. A similar stance was expected by the European Central Bank today, given the economic slump the Eurozone is in, but they held firm, and the Euro rallied 100 pips higher.

Not much has changed for the interest rate policy, as the ECB repeats the data-dependency. They acknowledge that inflation has slightly eased, but they are not declaring triumph just yet. That sent the Euro higher, since markets were anticipating some dovish remarks, but it seems like they’re trailing the FED. EUR/USD surged to 1.10 and even pierced that level now, although let’s see if this pair can hold gains above 1.10, since buyers have been failing before.

The sole major statement is that the central bank would stop reinvesting in PEPPs by the end of next year, with the goal of reducing the PEPP portfolio by €7.5 billion per month on average in 2H 2024. For the time being, the PEPP reinvestments will continue until the first half of 2024. Aside from that, the ECB did express some lower inflation estimates, but they are still sticking with a 2.1% forecast for 2025.

ECB Monetary Policy Decision – 14 December 2023

• Main refinancing rate 4.50% vs 4.50% expected
• Prior refinancing rate was 4.50%
• Deposit facility rate 4.00% vs 4.00% expected
• Prior deposit facility rate was 4.00%
• Marginal lending facility 4.75%
• Prior marginal lending facility 4.75%
• Inflation has dropped in recent months but likely to pick up against temporarily in the near-term
• Past rate hikes are continuing to be transmitted forcefully to the economy
• Tighter financing conditions are dampening demand, and this is helping to push down inflation
• Expects economic growth to remain subdued in the near-term
• Future decisions will ensure that rates will be set at sufficiently restrictive levels for as long as necessary
• To continue a data-dependent approach in determining the appropriate level and duration of restriction
• Rate decisions will be based on assessment of the inflation outlook in light of incoming economic, financial data
• ECB intends to discontinue reinvestments under the PEPP at the end of 2024
• 2023 inflation seen at 5.4% (previously 5.6%)
• 2024 inflation seen at 2.7% (previously 3.2%)
• 2025 inflation seen at 2.1% (previously 2.1%)
• 2026 inflation seen at 1.9%
• Full statement

EUR/USD Live Chart