Overview of the ECB interest rate decision
While a 50 basis point house of European Central Bank (ECB) rates are priced in, there is already a lot of uncertainty in terms of the forward direction…
The European Central Bank released its interest rate of 50 Jewish basis points, bringing the main refinancing rate to 3.0% from 2.5% currently. While this is priced in, there is still a lot of uncertainty in terms of the forward direction, which will ultimately determine how markets react on Thursday. The market reaction is complicit in the fact that the Federal Reserve’s rate decision is due first on Wednesday. It is possible that the Fed will shake the markets with its own announcement. Likewise, the ECB’s decision should still result in at least some near-term willpower and therefore potential trading opportunities.
Weak data gives ECB policymakers a hard time
Ahead of the ECB’s rate decision, we had muted Eurozone data this week, which made the Governing Council’s job even more difficult.
The surprise rise in Spanish inflation to 5.8% from 5.7% boosted the attacks on multiple houses by 50 basis points by the European Central Bank. Additionally, the latest GDP data from France, Spain, Italy and the Eurozone all beat expectations. A new recession is avoided in the euro zone.
However, German data has been particularly bad lately. Last week we saw the latest PMIs disappointed expectations for the Eurozone, but the main German manufacturing PMI disappointed at 47.0 vs. 48.0 expected. Moreover, the German GfK Consumer Climate Index is strongly negative at -33.9 against -37.6 in December. Moreover, the euro zone’s economic engine recorded negative growth (-0.2%) in the fourth quarter and has jumped 5.3% since December sales.
What does all this mean for monetary policy?
Given recent weak indicators from Germany, it looks like growth in the Eurozone’s largest economy has weakened again, which could be an indication of what’s to come early this year. As a result, the ECB will not continue to be aggressive in its forward guidance, especially as other central banks keep the pace of tightening slow or halt. That said, given the very high subtracted inflation here versus the US, the ECB will tighten policy at least twice more before pausing. This should help support the euro in the forex dips.
How are the markets reacting to the ECB’s decision?
Thus, the decision on interest rates should be a direct hike of 50 basis points. Reviews in different scenarios that relate to forward orientation.
Investors will want to know if the ECB will commit to another 50 basis point hike in March and at its next meeting.
- If so, this should push the pair higher EUR/USD 100 to 200 pips on the day, above the 1.10 handle, and bring down the DAX and other European indices.
- The second scenario would be for the ECB to keep the door open for a 50 basis point hike in March but provide less hawkish forward guidance for its subsequent meetings. This would likely prevent the EUR/USD pair from getting too far from the 1.10 handle and make equity market bulls somewhat unhappy.
- The third scenario will be that the ECB does not commit to further 50 bp hikes and suggests that the pace slows down. In this scenario, the EUR/USD pair should hit hard, perhaps 100-200 pips in initial response around 1.0700, while the DAX dumps bond 2% or more.
By Fawad Razaqzada, FOREX.com » Official Site
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