The European Central Bank (ECB) is expected to keep its deposit rate unchanged at 2.25% in July, following a 25 basis point increase in June, which marked its first rate hike since 2023 [1]. According to TD Securities strategists, the ECB's decision reflects weaker Euro area growth, easing inflation compared to projections, and a continued commitment to data-dependent guidance [1]. The strategists anticipate a muted market reaction to the July decision, with limited near-term impact on EUR/USD [1].
The ECB is likely to maintain its current stance, with President Lagarde expected to reiterate a measured approach during her press conference. She may indicate that the economic backdrop is tracking between the Base and Milder scenarios, but also emphasize that future policy will depend on the duration and intensity of the resumed Middle East conflict and the associated energy shock [1].
TD Securities assigns a 75% probability to the base case scenario, in which the deposit rate remains at 2.25% and the ECB's statement echoes previous meetings by emphasizing a data-dependent, meeting-by-meeting approach without pre-committing to a specific rate path [1]. The strategists see scope for one additional rate hike in September, which would move the deposit rate slightly above their estimate of the neutral range (2.00% to 2.50%) [1].
Overall, the ECB's cautious stance and lack of concrete forward guidance suggest that markets should not expect significant policy shifts in the near term, with any future moves hinging on evolving economic data and geopolitical developments [1].
CONCLUSION
The ECB is expected to keep rates unchanged in July, maintaining a data-dependent approach and leaving the door open for a possible hike in September. Market reaction is anticipated to be muted, with limited immediate impact on EUR/USD. Future policy decisions will depend on economic data and the progression of external shocks.