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

• EUR/USD eases towards 1.1130, staying within the previous session’s trading range.
• Mixed sentiment readings from the Eurozone have offered the Euro no relief from selling pressure.
• Confirmation of a December rate increase is what investors are seeking from the ECB.

Around 1.1130, EUR/USD is edging lower on Thursday after reaching highs near 1.1170 on Wednesday, leaving the 17-month low of 1.1113 in sellers’ sights. The Euro (EUR) remains within Wednesday’s range against the US Dollar (USD), with investors holding back ahead of the European Central Bank’s (ECB) monetary policy announcement.

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. Other sentiment figures published by the European Commission on Thursday painted a mixed picture: Consumer Confidence held at -17.9, while the Economic Sentiment Index slipped to 96.9 rather than remaining at 97.5 as markets had expected.

France adds to the ECB’s policy challenges

An unchanged Deposit Facility rate of 2.5% is widely anticipated when the ECB announces its decision later in the day. A signal of further monetary tightening is also highly likely, as elevated oil prices resulting from the Middle East war push consumer inflation well above the ECB’s target.

France’s debt is nevertheless likely to dominate the meeting. Its worrying level has driven French Treasury yields to 24-year highs, complicating the central bank’s monetary policy plans.

As Commerzbank analysts caution, “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.” A more restrained approach to subsequent rate increases might follow, weakening one of the few factors currently supporting the Euro.

Wednesday’s US rate decision from the Federal Reserve (Fed) matched expectations, with borrowing costs left on hold. Markets nevertheless interpreted Chairman Kevin Warsh’s remarks as leaning dovish, particularly his confidence that the “monetary medicine is starting to work”. That assessment suggests the bank might need fewer rate increases than markets anticipate. Following the Fed’s press release, the US Dollar softened moderately.