Euro faces sustained pressure before ECB rate decision

• 2.50% is the expected ECB deposit rate after Thursday's meeting.
• Investors continue to price in the possibility of a December central bank rate increase as energy costs sustain inflation pressures.
• Inflation risks, growth and the monetary policy outlook are in focus as markets await the ECB's remarks.

EUR/USD trades near 1.1140 in Thursday's Asian session. The pair is retreating after modest gains the previous day. Following the Federal Reserve's (Fed) decision to leave interest rates unchanged, the US Dollar (USD) is recovering its previous day's losses, putting pressure on EUR/USD.

At 3.75%–4.00%, interest rates were left unchanged by the Federal Reserve, which said economic activity was still expanding. Resilient domestic spending, solid capital investment and strong productivity growth featured in the Fed's statement. On employment, the central bank noted that job creation had matched workforce growth, with little movement in the unemployment rate.

Although the Fed recognised that inflation pressures remained high, it paused further rate increases to collect more data and judge the appropriate monetary policy stance. Two officials opposed the decision: Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack favoured an immediate rate rise.

With the underlying economy still strong, Fed Chair Kevin Warsh reiterated the Federal Open Market Committee's commitment to price stability and its 2% inflation target. He also set out the future policy timetable. The Fed will convene eight meetings next year, one of them without a formal vote, while he expects six policy-setting meetings in 2028.

For the Euro (EUR), expectations that the European Central Bank (ECB) will retain its 2.50% deposit rate on Thursday are a source of pressure. The anticipated hold follows cumulative rate increases of 50 basis points earlier in the year. Still, sustained energy-led inflation has kept open the debate over a possible further increase in December. Investors are therefore watching the ECB's assessment of inflation risks and economic growth, alongside any signals on the future interest rate path.

Q3 survey: Euro credit tightens modestly as ECB policy transmission remains smooth

Recent policy changes have had only a limited effect on credit conditions, according to Danske Bank analysts' reading of the ECB's Q3 Bank Lending Survey. Their assessment is 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.” Danske interprets this pattern as one that “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.”