- EUR/USD is trading at the highest level of more than 30 months.
- ECB monetary policy on December 10.
- Traders anticipate a no rate-cut.
The euro has gained more than two Percent against the US dollar in December, thereby recording its highest level since April 2018. Euro’s strength ahead of the upcoming ECB meeting on December 10 might be based on the slim chance of a rate cut.
However, the November meeting minutes suggest that the ECB members are inclined to recalibrate the monetary policy instruments in December as the sharper than expected slowdown in growth and inflation could jeopardise economic revival.
Traders expect the ECB to expand its 1.35 trillion euros Pandemic Emergency Purchase Program and assist banks through Targeted Longer-Term Refinancing Operation. President Christine Lagarde has touted both tools for adjusting the central bank’s monetary policy.
The International Monetary Fund’s call to ECB to look for options outside the current ones by pointing to the steep stagnation in consumer price growth in the European Union might weigh on the euro. The trading bloc was hit by four continuous months of deflation, with the headline inflation near -0.3 Percent.
The scenario of the ECB cutting the interest rates further has an only remote chance, with some participants reading the statement from Governing Council member Klaas Knot to point out such a possibility. Knot didn’t want to exclude any measure in the upcoming meeting – he was answering questions related to the policy tools in a recent interview. At present, markets assign 25 Percent chance of a rate cut at the December ECB meeting.
But, other prominent figures like Executive Board member Isabel Schnabel think that it is appropriate to preserve the present conditions rather than easing further as PEPP and TLTROs are proven to be highly effective.
Hence, the euro might continue to strengthen as traders sense only a little chance of any rate cut in the ECB December 10 meeting.