🔼 EUR gains ahead of ECB rate decision

📆 ECB set to announce rate decision at 1:15 pm BST

Euro is one of the best performing G10 currencies today. The ECB is scheduled to announce its next monetary policy decision today at 1:15 pm BST and markets expect that it will deliver the second 25 basis point rate hike in a row, pushing the deposit rate to 3.50% - the highest level since mid-2001. However, ECB is not expected to stop there with money markets pricing in one more 25 basis point rate hike later this year, most likely at the July or September meeting. A hint that rate hike is more likely to come in July than September could be seen as hawkish.

Money markets see two more ECB rate hikes by the end of the year. Source:Bloomberg

ECB has reasons to continue to tighten policy - while headline inflation has been decelerating for some time and core gauge also moved lower recently, both measures continue to run significantly above Bank's target. A point to note is that the ECB will also release a new set of economic projections today, including inflation forecasts. Forecasts will be released 30 minutes after the decision (1:45 pm BST), when ECB President Lagarde starts a press conference.

As scope for a surprise on rate decision looks very small, with all 45 economists polled by Bloomberg expecting a 25 bp rate increase, economic forecasts may be a key driver for European assets. ECB projections from March suggested that inflation is not expected to reach 2% target until 2025. An upward revision to those would likely see EUR gain while a downward revision, signaling that target may be reached earlier, could have a negative impact on common currency.

Inflation in the European Monetary Union started to decelerate but remains significantly above the ECB target. Source: Bloomberg, XTB Research

A look at EURUSD chart

EURUSD attempted to break above the 50-session moving average yesterday (green line) but failed as USD regained some ground following the FOMC decision. However, failure to break above the aforementioned moving average did not change the technical landscape - uptrend sequence is still present on the chart and a recent rebound off the mid-term trendline confirmed bullish momentum. A hawkish surprise, in terms of higher inflation forecast or more hawkish forward guidance, could provide support for the pair and a fuel for another test of the 50-session moving average. On the other hand, should ECB sent a dovish message, the near-term support to watch is an area ranging between 1.0750 mark and the 23.6% retracement of upward impulse launched in September 2022.

EURUSD at D1 interval. Source: xStation5