ECB, EUR Price Analysis & News
- ECB to Pave the Way For Rate Hikes
- Pushback on 50bps Hike to Result in Lower Euro
LIVE ECB COVERAGE: We will be providing live coverage of the ECB Decision from 12:30BST.
OVERVIEW: The ECB is set to announce an end to its asset purchase program, which will allow for a rate rise at its July meeting, as per the central bank’s forward guidance. While a rate rise today is unlikely the probability of such action is not zero. Elsewhere, attention will be placed on whether President Lagarde leaves the door open to a 50bps rate rise. What’s more, with the latest staff projections also released, the 2024 inflation forecast will garner the most attention for market participants.
Since the April meeting, the inflation outlook in the Euro Area has deteriorated further with headline prices rising to a fresh record high of 8.1% in May, from 7.4%, which in turn has prompted ECB Officials to step up their hawkish rhetoric. However, this begs the question, why not hike at the June meeting?. The answer to that is “sequencing”. ECB Chief Economist Lane broke the ECB’s previous rule of never pre-committing to policy action by announcing a roadmap of normalisation steps, involving the end of APP in July, followed by two 25bps rate hikes in July and September. This is effectively the base case scenario.
25bps or 50bps for the ECB
Meanwhile, a hawkish twist would be for President Lagarde to side with the more hawkish members of the Governing Council and leave the door ajar for a 50bps move, which would underpin the Euro taking the currency to 1.08, given that the markets have yet to fully price a 50bps hike at the July meeting (currently 32bps priced).
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What is priced in?
As it stands, money markets are pricing in over 130bps worth of tightening by year-end, which implies that markets see at least one 50bps rate rise from the central bank. However, should ECB’s Lagarde simply commit to the already laid out normalisation path by Chief Economist Lane, this would ultimately disappoint market expectations, prompting a dovish repricing. I would argue that there is an elevated risk of this happening, given the high bar to surprise on the hawkish side, which leaves EUR/USD vulnerable to a move back below 1.06.
ECB Market Pricing is Aggressive
Source: Refinitiv
New Tool For Fragmentation Risks
Elsewhere, despite recent reports over the ECB mulling a new QE backstop tool for peripheral debt to combat potential fragmentation risks, it is unlikely that the ECB will provide great details regarding this tool. Not only does this risk an unwind of the recent tightening in financial conditions, but the ECB is likely to maintain optionality for when the conditions arise to announce such details.
MARKET REACTION: Heading into the ECB decision, the Euro has been firmer across the board, suggesting that traders are gearing up for another hawkish surprise. However, this does leave the Euro vulnerable to a pullback should the ECB stick to its pre-set normalisation and not leave the door open to a 50bps rate hike. My view is that the ECB disappoints expectations, therefore underwhelming hawkish expectations, resulting in a lower Euro. Resistance resides at 1.08, while support sits at 1.0600-25.
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