ECB rate decision in focus as Euro stays under pressure

• Expectations ahead of Thursday's ECB meeting point to an unchanged deposit rate of 2.50%.
• Investors continue to price in the possibility of a December central bank rate hike as energy costs sustain price pressures.
• The ECB's assessment of inflation risks, growth and the monetary policy outlook remains firmly in the market's focus.

EUR/USD comes under pressure during Thursday's Asian session, trading around 1.1140 and reversing the previous day's modest advance. Weighing on the pair is a recovery in the US Dollar (USD), which is recouping the prior day's losses after the Federal Reserve (Fed) left interest rates unchanged.

With economic activity continuing to expand, the Federal Reserve retained its interest rate range at 3.75%–4.00%. Resilient domestic spending, robust 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, leaving the unemployment rate little changed.

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

Stressing the continued strength of the underlying economy, Fed Chair Kevin Warsh reiterated the Federal Open Market Committee's commitment to price stability and its 2% inflation target. Warsh also set out the future monetary policy meeting schedule. The Fed will convene eight meetings next year—including one without a formal vote—while he expects six policy-setting meetings in 2028.

Pressure on the Euro (EUR) also reflects expectations that the European Central Bank (ECB) will leave its deposit rate at 2.50% on Thursday, after raising rates by a cumulative 50 basis points earlier in the year. Yet persistent inflation fuelled by energy prices has kept alive the debate over a possible further increase in December. Investors are therefore watching closely for the ECB's assessment of inflation risks and economic growth, alongside any signals on the path ahead for interest rates.

Does modest tightening in euro credit conditions leave room for further ECB hikes?

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 notes 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.” For Danske, the pattern “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.”