European Central Bank Interest Rate Decision: Another 25 bps hike, Lagarde speech on focus

• 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 keeping its range around 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, although lacks follow-through 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.”

About the ECB interest rate decision

ECB Interest Rate Decision is announced by the European Central Bank. Usually, if the ECB is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the EUR. Likewise, if the ECB has a dovish view on the European economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative, or bearish.