Introduction to European Central Bank’s Monetary Policy
The European Central Bank (ECB) is expected to maintain its current interest rates for the remainder of the year, unless economic data surprises and deviates from expectations. Last month’s inflation rate precisely hit the ECB’s 2.0% target, and President Lagarde expressed satisfaction with consumer prices being in an ideal state. The direction of European monetary policy largely depends on whether data meets expectations and if inflation deviates from the target.
Market Expectations and Inflation Rate
The eurozone’s September CPI is set to be released on October 1. Economists predict that the preliminary eurozone CPI for September will rise from 2.0% in August to 2.3%, matching the expected unchanged core inflation rate of 2.3%. Rising food prices are considered the main driver behind the increase in consumer prices in September. However, before this data release, markets can gain early insights through Tuesday’s inflation reports from major economies, including France and Germany.
Factors Influencing the Euro’s Trajectory
The ECB’s dilemma is not within its direct mandate, which is the weak economic growth in the eurozone. Stimulating economic growth is not part of the ECB’s responsibilities, but if the economy stagnates or falls into a technical recession, inflation may drop below the target level. This presents a significant concern for the ECB, which took years to emerge from a low-growth, low-inflation environment. Many members of the Governing Council are already prepared to cut interest rates as soon as there are signs of weakening inflation, a policy inclination that could put downward pressure on the euro.
Predicting Market Reaction
Eurozone CPI data typically does not trigger sharp market fluctuations, as the weighted data from individual countries has already been released in advance. Significant deviations from expectations, along with speculation about potential central bank actions, are required to cause volatility. Nevertheless, this data remains a key indicator influencing the euro’s trajectory over the coming weeks and months. For EUR/USD, the key lies in comparing data from both sides of the Atlantic. While the ECB maintains interest rates due to inflation meeting its target, the Federal Reserve is expected to cut rates to support the economy, even though US inflation remains above target.
Market Dislike for Surprises
Markets dislike surprises, and since the EU and the US reached a trade agreement, avoiding retaliatory measures by the EU against Trump’s tariffs, the market has consistently expected inflation to remain moderate. Therefore, if consumer costs continue to rise, it may pose a challenge to the market’s euro forecasts. The recent strengthening of the euro has been driven by expectations of accelerating economic growth. However, if inflation rebounds and forces the European Central Bank to raise interest rates, the already fragile growth momentum in the Eurozone could be hindered or even brought to an end.
Conclusion
In conclusion, the European Central Bank’s monetary policy is heavily influenced by economic data and inflation rates. The expected rise in September’s CPI and the potential deviation from expectations may cause market fluctuations. The ECB’s decision to maintain or change interest rates will have a significant impact on the euro’s trajectory. As the market awaits the release of the eurozone’s September CPI, it is essential to consider the factors influencing the euro’s trajectory and the potential implications of the ECB’s monetary policy decisions. The euro was trading at 1.1723/24 against the US dollar at 09:02 Beijing time, and its future trajectory will depend on the interplay of economic data, inflation rates, and central bank actions.
