Lagarde speech: Governing Council weighed whether a rate hike was warranted

With key interest rates held steady at the October policy meeting, European Central Bank (ECB) President Christine Lagarde sets out the reasoning behind the ECB's decision and takes questions from the press.

What did Lagarde say?

"We have seen an increase in indirect effects from the energy price surge."

"We are not seeing a risk of second round effects in addition to what's in the projections."

"Cost of long-term financing clearly increased vs September."

"Governing Council debated whether a rate hike was appropriate."

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"Based on uncertainty, unchanged underlying inflation, Governing Council decided unanimously to hold."

"Measured approach remains appropriate at this point in time."

How did EUR/USD react?

A modest recovery from session lows followed the remarks, although EUR/USD was last trading at 1.1135, down 0.15% on the day.

Euro: frequently asked questions

Which countries use the Euro, and how widely is it traded?

Used by the 20 European Union countries within the Eurozone, the Euro ranks second only to the US Dollar among the world's most actively traded currencies. Its share of all foreign exchange transactions stood at 31% in 2022, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world's most actively traded currency pair. It is followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

How does the ECB's role affect the Euro?

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone's reserve bank, setting interest rates and overseeing monetary policy. Maintaining price stability is the ECB's core mandate, whether through containing inflation or supporting growth. Interest rate increases and cuts are its main policy instrument. The Euro usually benefits when rates are relatively high, or when higher rates are anticipated; the reverse also applies. Monetary policy is determined by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone's national banks and six permanent members, among them ECB President Christine Lagarde.

Why do inflation figures matter for the Euro?

Measured through the Harmonised Index of Consumer Prices (HICP), Eurozone inflation is a key economic indicator for the Euro. An above-forecast increase in inflation, particularly beyond the ECB's 2% target, requires the central bank to raise interest rates to bring price pressures back under control. When the region's interest rates are relatively high compared with those of its counterparts, the Euro usually benefits. Such rates make the region a more attractive destination for global investors to place their funds.

Which economic indicators can move the Euro?

By providing a measure of economic health, data releases can move the Euro. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys are among the indicators that can shape the single currency's direction. Economic strength supports the Euro by attracting greater foreign investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak economic readings, by contrast, are likely to weigh on the Euro. Particular importance attaches to figures from Germany, France, Italy and Spain, the euro area's four largest economies, which together represent 75% of the Eurozone economy.

Why does the Trade Balance matter for the Euro?

The Trade Balance is another important release for the Euro, showing the difference between a country's export earnings and its import spending over a specified period. Strong overseas demand for a country's exports creates additional demand for its currency as foreign buyers seek to purchase those goods, thereby lifting its value. A positive net Trade Balance therefore strengthens the currency, while a negative balance has the opposite effect.