ECB to Hold as Traders Look For Hike Signals

Officials at the ECB have repeatedly used the "good place" phrase when discussing interest rates, but with inflation persistently above target, there are growing voices saying the next move will be a hike.

The Key Points

• Markets and economists are unanimous in expecting a hold at the upcoming meeting, the fourth time in a row that rates are left unchanged.
• Traders are looking for signs that the ECB might adopt a more hawkish stance, as inflation remains persistently just above the target.
• A more hawkish ECB contrasts with a dovish Fed, which could continue to support the EURUSD.

ECB to Hold Rates for Now

Economists are unanimous in expecting the ECB to keep rates unchanged for the fourth time in a row at the conclusion of its Thursday, December 18 meeting. Those economists go further, saying they expect rates to stay on hold until at least the end of next year. However, markets are increasingly uncertain about that outlook. Over the prior week, the EURUSD has appreciated as futures have started to price in an ECB rate hike in October 2026. The question for traders now is whether a hawkish bias will emerge in the central bank's rhetoric, which could further support the euro against the greenback, as the Fed is widely expected to remain dovish next year.

After bringing inflation back to target, the ECB could now face a consumer price problem. The central bank can tolerate some fluctuation away from the 2.0% rate, assuming that excursions to the upside are offset by occasionally falling below the target. But in November, Euro Area inflation rose to 2.2%, with German consumer prices increasing at the fastest rate in nine months. Over the period, the Eurozone economy has remained relatively stable, but it is expected to accelerate next year due to increased government spending. This could put upward pressure on inflation. Analysts suspect the ECB may seek to get ahead of this move by attempting to tame inflation through rhetoric. Even if a rate hike is not expected for several months, ECB President Christine Lagarde may adopt a hawkish stance. That could further support the EURUSD, which is just shy of yearly highs reached back in September.

Euro Looking for a Boost?

Earlier this month, noted hawk and Germany's ECB member Isabel Schnabel was the first of the central bank's policymakers to publicly signal that the next move will be a rate hike. This suggests that inflation may be a focal point of deliberations at the ECB meeting, and the statement could be more hawkish. Markets appear to be pricing in that possibility, and any disappointment could weaken the euro. Given the strong consensus, it's unlikely that the ECB decision to hold will have a significant impact on the markets. Instead, traders are likely to react to the perceived hawkish or dovish tone. Notably, if Lagarde drops her favourite phrase of late, that interest rates are "in a good place", markets could have a stronger reaction.

EURUSD Takes Tightening Formation

Fibre formed a shooting star pattern on Tuesday, leaving behind trendline resistance to a potential pennant pattern at 1.1800. Given the overbought RSI, it could pull further back to reveal further directional clues. The next support level below 1.1700 is seen at 1.1650, which would expose 1.1615 and perhaps 1.1600 if prices were to hold firm. A break below that level could see increased selling pressure towards the lower trendline, where a triangle could form. On the other hand, if the narrative is hawkish, the pair could accelerate outside the upper trendline and head towards the peak of 1.1920 if 1.1900 gives way to bulls. The next resistance above is at 1.2000 psychological resistance.

Source: SpreadEx | EURUSD