ECB decision
Later today the European Central Bank is scheduled to deliver its latest monetary policy decision. As a recap, the central bank has spent the last year publishing 10 back-to-back hikes to the benchmark rates within its suite of monetary policy tools. Today, however, it seems almost certain that European policy makers call time on this cycle and elect for a hold in rates. There is little doubt that Europe still has a significant inflation problem. However, the narrative from the central bank and market has suggested that in the view of policy makers, and mimicking other central banks ahead of it, it’s time for a pause from the ECB.
That will leave the Eurozone benchmark deposit policy rate at 4%. Close observers of ECB policy will note an array of rates higher than 4% in the ECB’s toolkit. However, it is this deposit rate that is most widely quoted and most comparable to the BoE’s ‘bank rate’ and the Fed Funds target band. The challenge for the Euro will be as follows. With a target band of 5.25-5.5% at the Fed, transatlantic interest rate differentials at the policy level are relatively contained. However, investors’ recent selling frenzy within US debt instruments has widened the perceived policy divergence underlying the Euro and US Dollar. We have seen longer dated market pricing of fixed income products be the driver of spot and forward FX pricing, not policy rates. A pause at the central bank level today is unlikely to do any favours for such fixed income pricing but may insulate the Euro in the absence of the rhetoric surrounding the discussion.
Those who have followed recent releases from the ECB will also note the theme of policy wording and press conferences having a negative impact upon the Euro. Encouraging bond buying and a decline in rate expectations, the discussion following recent decisions has proved detrimental to the Euro. Despite the level we see the Euro at today, investors will struggle not to be mindful of Lagarde’s recent propensity to talk down the Euro. Lastly, whilst a hold might allow Lagarde to skirt too much concentrated discussion on the deposit rate, the myriad of monetary tools deployed by the ECB in recent years and their continuing legacy and impact could be up for discussion. If the ECB chooses to address its multifaceted QE hangover, for example, we could see markets take swift action.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Daily Brief – Greenland Deal
Humphrey Percy
Fri 23 Jan 2026
Greenland Deal Do not expect details of the deal here since only a select few know what was discussed between POTUS and Mark Rutte, Head of NATO or indeed even if there is a deal as opposed to a face-saving way forward between POTUS and NATO/Europe. The suggestion is that (finally) senior Republicans have woken […]
Daily Brief – Chancellor Reeves
Humphrey Percy
Wed 5 Nov 2025
Chancellor Reeves Market observers were no better informed at the end of the Rachel Reeves speech than they were at the outset yesterday morning. The only surprise was that having comprehensively floated options in the past two months for inclusion in her November 26 Autumn Statement, that the Chancellor should have elected to speak at […]
Daily Brief – UK Wage Growth
Humphrey Percy
Wed 21 Jan 2026
UK Wage Growth With yesterday’s UK employment figures came some somewhat surprising commentary: inflation at 3.2% was good news for the Bank of England and the likelihood for a cut in interest rates had increased. The latter is of course good for the economy and particularly beleaguered householders worrying about their cheap mortgage deals running […]
