The euro-dollar pair tested the 7th figure on Thursday. Although traders later did not hold their positions, the bulls still managed to update the six-month price high, reacting to the outcome of the European Central Bank's December meeting. More precisely, the upward momentum was provoked by ECB President Christine Lagarde, who made rather hawkish remarks at the final press-conference. But not all her comments could be interpreted in favor of the single currency. Therefore, the December meeting turned out to be quite a controversial event.
The formal outcome of the meeting was predictable: the ECB raised interest rates by 50 basis points as expected and announced its intention to start normalizing the balance sheet, which has increased to nearly 5 trillion euros after years of asset purchases. The Bank announced that the asset-purchase program (APP) will be reduced "at a predictable level" from the beginning of next March. The central bank "will not reinvest all of the principal payments from maturing securities. The decline will amount to 15 billion euros per month on average until the end of the second quarter of 2023 and its subsequent pace will be determined over time".
All these decisions were announced by ECB representatives long before the December meeting, so the market actually ignored the immediate results of the meeting. The main intrigue was in the assessment of future prospects, so traders were focused on Lagarde's press conference.
Lagarde made several important statements.
Firstly, she announced that the ECB will be tightening its monetary policy in 50-point (instead of 75-point) steps "over a period of time". The current scenario, she said, involves a 50-basis-point rate hike"at our next meeting, and possibly at the one after that, and possibly thereafter,". On the one hand, this is a hawkish signal, but on the other hand, Lagarde again outlined a time horizon for tightening monetary policy. Let me remind you that as a result of the September meeting, Lagarde limited the process of tightening the monetary policy within the next six months. According to her, the ECB will need "from two, but up to five more meetings" to complete this process. Lagarde's statement harmonizes with the previous one: it suggests that after the March or April meeting the ECB will take a wait-and-see approach.
Second, Lagarde declared that there is still a risk of accelerating inflation in the European region. However, she allowed for an alternative option (less likely, but still). According to her, a drop in energy prices or a decrease in demand in the economy "can help reduce price pressures in the medium term." This remark should be considered in the context of the ECB's accompanying statement. It states that the central bank is planning to raise the rates at the next meetings, but the decision will depend on the dynamics of inflation and the situation in the economy. Let me remind you that the last published inflation report showed the first signs of CPI slowdown in the eurozone. The overall annualized consumer price index came in at 10.0% (instead of the forecast increase to 10.4% and the previous peak of 10.6%). Core inflation came out at the forecasted 5% (as in the previous month).
And while the rate of inflation in the eurozone is still unacceptable for the ECB, the first signs of a slowdown in CPI, in my opinion, strengthened the position of those ECB representatives who are in favor of reducing the pace of monetary policy tightening. Among them is ECB Chief Economist Philip Lane. As we can see, the option of 75-point rate is not considered at all. As for the 50-point rate hike, Lagarde is only talking about it with certainty in the context of the February meeting. All subsequent hawkish decisions are in question, marked "possible."
Third, Lagarde acknowledged that not all members of the Governing Council agreed with the tactics. However, she did not go into detail here, saying only that "some might have wanted to do a bit more, some might have wanted to do a bit less". The very fact that there is a split could weigh on the single currency. But it's impossible to assess the balance of power in the council at the moment, given Lagarde's vague stance. The situation will be more clear when ECB representatives start to comment on the outcome of the December meeting.
EUR/USD traders also cannot form a consensus about the results of the meeting. After climbing to 1.0737, the price fell to the 1.0625 mark. However the bears couldn't progress further, they failed to return to the 5th figure area. The pair was around 1.0650 when this article was written.
As we can see, the outcome of the ECB December meeting can be interpreted both in favor of the bulls and the bears. The situation is currently uncertain, so it is better to refrain from buying or selling the pair. I suppose that within the next day the scales will tip in one of the sides, when traders have to define the answer to the question: is the glass half full or half empty?
