Euro eases within trading range as ECB monetary policy decision takes centre stage

• EUR/USD retreats towards 1.1130. Trading remains within Wednesday’s range.
• Pressure on the Euro persists despite a mixed set of Eurozone sentiment readings.
• Confirmation of a December rate increase is investors’ focus ahead of the ECB decision.

1.1130 is the area EUR/USD is edging down towards on Thursday. The Euro (EUR) is weaker against the US Dollar (USD), having retreated from Wednesday’s highs near 1.1170. Trading remains within Wednesday’s range as investors await the European Central Bank’s (ECB) monetary policy decision. Bears are watching the 17-month low of 1.1113.

Thursday’s European Commission sentiment releases offered a mixed picture. October’s Business Climate reading rose to 0.09 from September’s -0.05, moving into positive territory for the first time in the last three years. Consumer Confidence held at -17.9. Meanwhile, the Economic Sentiment Index slipped to 96.9, below market expectations for an unchanged 97.5.

France’s debt complicates ECB policy

An unchanged Deposit Facility rate of 2.5% is widely expected when the ECB announces its decision later in the day. The bank is also highly likely to signal further monetary tightening. Elevated oil prices resulting from the Middle East war are driving consumer inflation to levels well above the ECB’s target.

France’s debt is nevertheless likely to dominate the meeting. It has climbed to worrying levels, pushing French Treasury yields to 24-year highs and complicating the central bank’s monetary policy plans.

The risk is highlighted by Commerzbank analysts, who warn that “every interest rate hike by the ECB naturally also raises yields and thus exacerbates France’s problem of getting its public debt under control due to rising interest payments.” Faced with this, the ECB might take a more cautious stance on future rate increases, weakening one of the Euro’s few remaining sources of support.

Wednesday’s US rate decision from the Federal Reserve (Fed) was in line with expectations, with rates held steady. Markets nonetheless viewed Chairman Kevin Warsh’s remarks as dovish, particularly his confidence that the “monetary medicine is starting to work”. His assessment suggests the bank might need fewer rate increases than the market anticipates. Following the Fed’s press release, the US Dollar weakened moderately.