The European Central Bank (ECB) is expected to hold interest rates steady today with the policy rate to remain at 2.00%. The central bank is seen maintaining the data-dependent and meeting-by-meeting approach in the statement. We won’t get macroeconomic projections at this meeting, so the focus will be on the press conference and Lagarde’s comments on the euro.
The data since December hasn’t been pointing to any need in adjusting monetay policy. The Flash Q4 GDP Q/Q came at 0.3%, above the ECB’s 0.2% projection. The unemployment rate fell back to record lows. The ECB’s wage growth tracker points to some modest increase. The PMIs were mixed but still showing stable economic activity. Lastly, the Eurozone inflation data ticked slightly lower with the Core CPI coming in at 2.2% vs 2.3% prior.
The ECB policymakers repeated several times that monetary policy remains in a “good place” and they won’t respond to small or short-term deviations from their 2% target, unless there’s a clear shock in the economy.
The focus today will be mostly on Lagarde’s press conference where there will certainly be questions about the recent euro’s appreciation. In fact, last week we had a few ECB members kind of jawboning the euro after it broke above the 1.20 level against the US Dollar. As a reminder, last year ECB’s Vice President de Guindos said that 1.20 on the EUR/USD exchange rate is something they could tolerate, but anything above that would complicate the outlook for them.
Lagarde is expected to keep a neutral tone and not give away much. If we get clear signals of discomfort about euro’s strength, then we could see more weakness for the currency especially amid the better and better US data. It wouldn’t be surprising at all seeing EUR/USD falling back to 1.16 in the next few weeks.
