ECB Preview: focus shifts from rates to guidance as geopolitical risks grow

The European Central Bank is widely expected to leave interest rates unchanged on Thursday, with policymakers likely to maintain a cautious, data-dependent stance after recent inflation developments. Headline inflation has continued to moderate, but the recent surge in oil prices following heightened tensions in the Middle East has introduced fresh uncertainty into the outlook. While energy-driven inflation could delay the disinflation process, the ECB is also mindful that tighter financial conditions and slowing economic activity continue to weigh on growth.

Markets will therefore focus less on the rate decision itself and more on President Christine Lagarde's guidance. Investors will be looking for any indication of how the ECB intends to balance the risk of renewed inflationary pressures against signs of a weakening economy. Policymakers are likely to emphasise that they are not committed to a predefined policy path and will continue to assess incoming data meeting by meeting.

The recent diplomatic signals between the US and Iran, which have helped ease oil prices from their highs, may also feature indirectly in the ECB's assessment. A sustained pullback in energy prices would reduce upside inflation risks, while a renewed escalation could force policymakers to remain restrictive for longer than markets currently expect.

For financial markets, the reaction will likely hinge on the tone of the press conference. A more cautious or hawkish message that highlights inflation risks could support the euro and push European bond yields higher. Conversely, if the ECB places greater emphasis on slowing growth and downplays the inflation impact of recent energy moves, markets may revive expectations that policy easing could resume later in the year, weighing on the euro while providing support for European equities.

EUR/USD remains under pressure ahead of Thursday's ECB meeting, with the pair consolidating around 1.14 after failing to sustain a recovery above its key moving averages. Diverging monetary policy expectations continue to favour the dollar, as the Federal Reserve maintains a relatively hawkish stance while the ECB is expected to leave rates unchanged and strike a cautious tone amid slowing growth and geopolitical uncertainty.

EUR/USD daily chart

Past performance is not a reliable indicator of future results.

From a technical perspective, the outlook remains mildly bearish. EUR/USD continues to trade below its 50, 100 and 200-day moving averages, suggesting sellers retain control despite recent stabilisation. Momentum indicators are more neutral, with the RSI around 45, indicating bearish momentum has eased but has yet to turn positive. Initial support sits around 1.14, with a break lower exposing the recent lows near 1.13. On the upside, a move back above the cluster of moving averages between 1.15 and 1.16 would be needed to improve the technical picture and signal that buyers are regaining control.

For now, the ECB meeting is likely to be the key catalyst, with the euro's next move depending largely on whether President Lagarde delivers a more hawkish or dovish message than markets currently expect.