ECB Snapshot » A 50bps rate hike could still be likely
- Soaring inflation should outweigh concerns over financial stability
- The market has significantly lowered the key ECB rates
- The EUR/USD pair broke the resistance of 1.07 thanks to the weakness of the US dollar
The European Central Bank (ECB) is expected to decide on its monetary policy on Thursday. Until a few days ago, I walked away convinced that the central bank was raising the interest rate by 50 basis points. After all, that is precisely what ECB President Christine Lagarde and several other members had strongly implied. But things have changed dramatically in recent days. However, will this be enough to discourage the ECB from climbing 50 basis points?
Markets repriced ECB rate hikes lower
While I’m left is a little choppy due to the proceeds after the SVB unwind, investors are now only expecting a 25 basis point increase coming out of Thursday’s meeting. Its value is the probability of an increase of 0.5% less than a coin-flip. In terms of the benchmark rate, they now see the benchmark deposit rate peaking at 3.40%, which would be some 80 basis points lower than just a week ago.
Will the bankruptcy of the SVB discourage the hawks?
Recent developments regarding SVB certainly rightfully have a discussion of a 25bp house. Some doves in the ranks of the ECB would no doubt argue that greater caution is needed. Still, it is likely that bellicose members of the council of governments, and you understand ECB President Lagarde, are suggesting that the risk of contagion is a possibility and that swift actions by the US government later this week-end are significant that small banks are less likely to fail. . The latter group would not want the ECB to fall even further behind in the fight against inflation, which many would agree is already losing. It was only last week that Lagarde said a 50 basis point hike was “very, very likely.” She added that “I don’t think I can think of scenarios, when things are so extreme, I don’t think that happens.” Does the bankruptcy of the SVB, a small American bank, fall within this scenario?
What do we expect from the European Central Bank?
While some of the hawks on the European Central Bank’s Governing Council no doubt continued to press for an aggressive hike, due to high inflation, the doves are likely to provide stiff opposition in light of the collapse of two American banks, which are accumulating financial stability risks. That said, we think the risks remain tilted towards a 50bp upside. We believe that stronger inflation data would prevail over financial stability concerns, which could lead the ECB to disappoint the market’s substantial repricing of policy rates.
High inflation remains a major concern for the ECB
Recently released eurozone inflation data barely slowed in February. Headline CPI fell slightly to 8.5% year-on-year, but still beat expectations for a slowdown to 8.3%. Still pending, core CPI accelerating to a new high of 5.6% from 5.3%. Core inflation is at the center of the ECB’s concerns and the fact that it has increased further justifies even greater tightening.
How will the EUR/USD pair react to the ECB’s rate decision?
the pair EUR/USD is likely to react positively to any hawkish surprises from the ECB given the heightened risks to financial stability in the US and the sharp rate cut there. Additionally, a 50 bps house will send the EUR/USD pair home, so a 25 bps house will send prices down to 1.0600.
Ahead of the European Central Bank’s rate decision, EUR/USD price broke above the 1.0700 resistance level on expectations that the ECB may tighten policy more than the Fed in the coming months. meetings. The breakout has potentially set the stage for a run to the next level of resistance around the 1.08 area – and possibly even higher, depending on the outcome of the ECB meeting.
EUR/USD daily chart
The main risk for EUR/USD right now is if sentiment is told the dollar will find support on safe-haven flows. If EUR/USD price breaks back into trouble below 1.0700 now and holds below that level, it will allow bulls in.
Likewise, the downtrend will not entirely rebuke the least as rates dip below key support around 1.0500 this week. But if this level breaks, we expect to see follow-up technical selling towards the 200-day moving average and the former around 1.0340 then support.
However, our baseline assumption is that the EUR/USD pair will rise as investors assess the risks of further aggressive rate hikes from the Fed.
Conclusion
Given that inflation remains three times high in the Eurozone, we believe there is already a good chance that the European Central Bank will not return to its strong guidance of a 50 basis point house and thus disappoint expectations. market for a smaller increase.
By Fawad Razaqzada, FOREX.com » Official Site
Fawad is an experienced analyst, business educator and economist. He produces research and analytical content using his extensive knowledge of the global economy and financial markets, which he has acquired over the past 12 years in the industry. Fawad specializes in forex, equity indices and early markets, using a combination of fundamental analysis and techniques for four actionable trade ideas and anticipating potential market movements. His macro commentaries are regularly quoted by major financial publications reported by Reuters and Market Watch.
Disclaimer: The information and opinions contained in this report are provided for general information only and do not constitute an offer or solicitation to buy or sell forex cambio contracts or CFDs. Although the information contained in the document comes from sources believed to be reliable, the author does not guarantee its accuracy or completeness, and assumes no responsibility for any direct, indirect or consequential damages which may result in a breach.
