The European Central Bank (ECB) is on track to leave its key interest rates unchanged after its July policy meeting, after having reduced rates at each of its last seven meetings. The decision will be announced on Thursday at 12:15 GMT.

The interest rate decision will be followed by ECB President Christine Lagarde's press conference at 12:45 GMT.

The ECB policy announcements will likely have a significant impact on the EUR/USD performance, as the Euro (EUR) is expected to experience intense volatility following the decision and during President Lagarde's press conference.

With a no-rate-change decision widely priced in, the focus will be on the ECB's policy statement for any hints on whether the central bank will resume its interest rate-cutting cycle later this year amid uncertainty over the potential impact of higher United States (US) tariffs on the Eurozone economy and a stronger Euro.

The primary reason behind the ECB's likely pause is the bloc's inflation, as measured by the Harmonized Index of Consumer Prices (HICP), returning to the bank's target of 2% in June.

Though the closely watched services inflation edged up slightly to 3.3% in June, after cooling in May to 3.2%, the gauge was still down from a 4% reading in April.

Additionally, mounting tensions over the likelihood of a trade agreement between the US and the European Union (EU) by the August 1 deadline could persuade the ECB to remain in a wait-and-see mode on Thursday.

Citing some officials from the European Commission, the Financial Times reported on Wednesday that the EU and US are closing in on a trade deal that would impose 15% tariffs on European imports, while waiving duties on some items.

The central bank will look to seek more clarity on the trade scenario before considering any changes to its interest rate trajectory.

Another factor that the ECB could consider when determining its path forward on interest rates is the appreciation of the EUR so far this year, which has been helped by a sustained downtrend in the US Dollar (USD).

US President Donald Trump's erratic trade policies and repeated attacks on the US Federal Reserve's (Fed) independence have been the key catalysts behind the USD downtrend.

The narrative that a stronger EUR could bring down imported inflation, in turn, raising the odds of inflation undershooting the ECB's target, could lead the bank to resume rate cuts later in the year.

Therefore, prudence on the rate cut path seems like the optimal decision for the central bank in July, with markets seeing a rate cut at the September meeting.

How could the ECB meeting impact EUR/USD?
Heading into the ECB showdown, the EUR/USD pair is building on its recovery from three-week troughs of 1.1556. Will the turnaround sustain?

If the ECB Monetary Policy Statement or President Lagarde hints that the disinflationary trend remains intact, despite the tariff impact, it could revive expectations of rate cuts by the year-end. In this scenario, EUR/USD could resume its correction from multi-year highs.

On the other hand, EUR/USD could recover further ground if the ECB acknowledges potential upside risks to inflation and Lagarde sticks to the bank's ‘data-dependent' approach to assess the tariff impact.

Source: Investing.com