Euro Slides as Traders Focus on ECB Decision and Fed Pause

Key Moments

Euro Weakens Against Dollar Ahead of ECB Meeting

EUR/USD is under pressure during Thursday’s Asian session, hovering near 1.1140 after giving back modest gains from the prior day. The move comes as the US Dollar (USD) recovers some ground in the wake of the latest Federal Reserve policy announcement, which left interest rates unchanged.

The softer Euro reflects investor caution going into the European Central Bank’s upcoming policy decision. Market participants are positioning around expectations that the ECB will leave its deposit rate at 2.50%, while staying alert to any signals about the outlook for inflation and growth.

Fed Holds Rates; Dissenters Push for Immediate Hike

The Federal Reserve opted to maintain its target range for interest rates at 3.75%-4.00%, stating that economic activity continues to expand. In its policy statement, the Fed pointed to solid domestic demand, noting resilient household spending, strong capital investment, and firm productivity growth.

Regarding employment, the central bank reported that job gains have remained in line with labor force growth and that the unemployment rate has shown little overall movement. On inflation, policymakers acknowledged that price pressures remain elevated but chose to pause further tightening in order to gather more data and reassess the appropriate stance of policy.

The decision was not unanimous. Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented, favoring an immediate increase in rates rather than a hold.

Fed Chair Kevin Warsh reiterated the central bank’s resolve to restore price stability and return inflation to its 2% target, while underscoring that the underlying economy remains robust. He also provided details on the Fed’s policy calendar, indicating that the central bank will convene eight times next year – including one meeting without a formal vote – and that he expects six policy-setting meetings in 2028.

ECB Outlook: Rate Hold Now, Potential Action in December

The Euro is contending with policy uncertainty as the European Central Bank is expected to keep its deposit rate steady at 2.50% at Thursday’s meeting. This follows a cumulative 50 basis points of rate increases earlier in the year.

Persistent energy-related inflation continues to fuel investor debate over whether the ECB might implement another rate hike in December. As a result, markets are highly focused on how the ECB assesses inflation risks, its view on the growth outlook, and any forward guidance on the future path of interest rates.

Credit Conditions: ECB Tightening Pass-Through Seen as Gradual

Analysts at Danske Bank point to the ECB’s Q3 Bank Lending Survey as evidence that the impact of recent policy moves on credit conditions has been contained. They emphasize that “banks tightened credit standards more than expected, although the net share reporting a tightening remained low from a historical perspective and was mainly driven by banks in France.”

In Danske’s assessment, this outcome “suggests that the ECB’s tightening has so far only led to a modest tightening of credit standards and should not in itself stop the ECB from tightening further as the pass-through remains relatively smooth.”

ECB Deposit Facility Rate – Latest Reading

The rate on the deposit facility is one of the European Central Bank’s three principal policy rates. It determines the interest banks earn when placing excess funds with the ECB and is announced at each of the central bank’s eight scheduled meetings per year.