Euro eases within range: what will the ECB’s monetary policy decision bring?

• EUR/USD retreats towards 1.1130, staying within the range established on Wednesday.
• Pressure persists on the Euro despite a mixed set of Eurozone sentiment readings.
• Confirmation of a December rate hike is what investors are looking for from the ECB.

Selling pressure on the Euro (EUR) against the US Dollar (USD) persists on Thursday, though trading remains within Wednesday’s range as investors await the European Central Bank’s (ECB) monetary policy announcement. After reaching highs near 1.1170 on Wednesday, EUR/USD slips towards 1.1130, leaving bears focused on the 17-month low of 1.1113.

Mixed signals emerged from the European Commission’s sentiment figures published on Thursday. October’s Business Climate reading rose to 0.09 from September’s -0.05, moving into positive territory for the first time in the last three years. Consumer Confidence, however, held at -17.9, while the Economic Sentiment Index slipped to 96.9, below market forecasts for an unchanged reading of 97.5.

How does France complicate the ECB’s policy outlook?

An unchanged Deposit Facility rate of 2.5% is widely anticipated when the ECB announces its decision later in the day. The central bank is also highly likely to signal further monetary tightening, with elevated Oil prices resulting from the Middle East war pushing consumer inflation well above its target.

France’s debt is nevertheless likely to dominate the meeting. Its rise to worrying levels has driven French Treasury yields to 24-year highs, complicating the central bank’s monetary policy plans.

The difficulty is highlighted by Commerzbank analysts, who warn that “every interest rate hike by the ECB naturally also raises yields and thus exacerbates France’s problem of getting its public debt under control due to rising interest payments.” Faced with this risk, the ECB might take a more guarded approach to further rate increases, weakening one of the few factors currently supporting the Euro.

In the US, interest rates were held steady on Wednesday by the Federal Reserve (Fed), in line with expectations. Yet Chairman Kevin Warsh’s remarks were interpreted as leaning dovish, particularly his confidence that the “monetary medicine is starting to work”. His assessment suggests that the central bank might need fewer rate hikes than markets anticipate. Following the Fed’s press release, the US Dollar softened moderately.