Euro edges higher as markets digest ECB pause

The euro is in positive territory on Friday. In the European session, trading at 1.0846 in the European session.

ECB maintains interest rates

To nobody’s surprise, the European Central Bank left its benchmark rate unchanged at 4.0% on Thursday. The ECB last raised rates in September and as with the Federal Reserve, the rate-hiking cycle is likely done. The key focus currently is when the ECB can be expected to start lowering rates. The markets have widely priced in a rate cut in April and are expecting 140 basis points in cuts this year, but the ECB is not on the same page and continues to push back against market expectations.

It wasn’t long ago that ECB President Christine Lagarde was insisting that rate cuts were not on the table, but she pivoted at the Davos summit, saying that a rate cut was likely in June. Lagarde may have chosen Davos to change her stance rather than at Thursday’s ECB meeting in order to minimize the market’s reaction to her abrupt change in her stance.

At the ECB meeting, Lagarde stood by her Davos comments but at the same time insisted that it was “premature to discuss rate cuts”. She noted there were still upside risks to inflation, including the Middle East crisis which could lead to higher energy and freight costs and hurt global trade.

Lagarde may be reluctant to discuss rate cuts, but the timing of an initial cut is very much on the minds of investors, reflecting the discrepancy we are seeing between the ECB and the markets regarding the rate path. One topic that both Lagarde and the markets can agree on is that upcoming rate decisions will be highly dependent on key data, in particular inflation and employment reports.

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EUR/USD Technical

• EUR/USD is testing resistance at 1.0888. Above, there is resistance at 1.0929
• There is support at 1.0843 and 1.0802

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