EUR/USD drops as ECB keeps interest rates steady at 4.5% as expected

• EUR/USD falls as ECB maintains Main Refinancing Operations Rate unchanged at 4.50% straight for third time.
• ECB Lagarde is seen reiterating the timing for first rate-cut in late Summer.
• Volatility may explode after the release of the US Q4 GDP data.

The EUR/USD pair faces a sell-off as the European Central Bank (ECB) has kept the Main Refinancing Operations Rate unchanged at 4.50% in its first policy meeting of 2024. The ECB was widely anticipated to maintain status-quo for the third time in a row. The central bank has kept the Rate on Deposit Facility at 4% as expected.

As the interest rate policy is largely in-line with market expectations, guidance on interest rate cuts will be keenly watched. ECB President Christine Lagarde is expected to reiterate the timing for first rate cut in the late Summer.

S&P500 futures have generated nominal gains in the European session, indicating a risk-on mood. Steep volatility could emerge after the release of the crucial United States data. The US Dollar Index (DXY) hovers near 103.30 while 10-year US Treasury yields have dropped to near 4.16%.

Meanwhile, investors await the US Q4 Gross Domestic Product (GDP) data, which will provide fresh guidance over the interest rate outlook. Investors have projected that the US economy grew at a slower pace of 2.0% after expanding at a robust pace of 4.9% in the July-September quarter of 2024. This would accelerate hopes of an interest rate cut by the Federal Reserve (Fed) in the first half of 2024.

Going forward, market participants will wait for the core Personal Consumption Expenditure (PCE) price index data for December. A stubborn core PCE inflation report would allow Fed policymakers to continue to lean towards restrictive interest rate stance.