Get ready for the ECB to hike rates (but not tomorrow)

The ECB is expected to announce its monetary policy decision tomorrow, where the focus will be on the rate forecast from July.

There has been a growing chorus of calls for the ECB to raise rates, but they are unlikely to raise rates this week. Tomorrow’s meeting is really about officially announcing the end of the asset purchases and signaling that the increases will begin in July. And while it would be a welcome bonus for the ECB to announce the Cut from the July hike, we are not holding our breath.

Will the ECB increase in increments of 25 or 50 basis points?

Forecasters are split between 25 and 50 basis point increments, and we can’t blame them. There is no immediate sign of inflation stopping to catch its breath using the headline CPI numbers. Both monthly and annualized CPI point to a sharp rise for France, Germany and the wider Eurozone – and that alone calls for the ECB to join the rate hike party, especially as the latest trend is now for increases of 50 basis points.

Yet, as ECB President Lagarde herself points out, the eurozone is not facing excessive demand or an overheated economy, and much of the inflation has been imported from the eurozone. outside the euro area. Ultimately, this weighs on consumer and business sentiment, so a series of 50 basis point hikes seems unlikely, despite elevated levels of inflation.

In all likelihood, the ECB will choose to raise rates by 25 basis points in July and September, leaving room for further hikes in October and December. They want to be seen playing, but are clearly happy to be one of the last out. And whether they move to a 50 basis point increment will likely depend on whether inflation starts to subside in H2.

Eurozone inflation remains high, but there are early signs of a slowdown

But there are signs that inflationary pressures may be easing. Consumer inflation and selling price expectations for the Eurozone fell sharply in May, as did German producer prices and import costs. Still, changing the needle tomorrow is unlikely. The ECB looks set to announce a hike in July, although we’ll probably have to wait to find out how aggressive those hikes will be.

EUR/USD snakes around 1.7000 ahead of ECB meeting and US CPI

One problem that Euro bulls may now face is that any upcoming ECB hike has been well telegraphed, leaving room for disappointment (and a weaker Euro). Of course, a further rise in US inflation on Friday would likely exacerbate any bearish movement in EUR/USD. But, if the ECB surprises with a hawkish forward guidance tomorrow and is coupled with another (more) weak inflation report on Friday for the US, we expect a decent rally above 1.0800 .

The risk leading up to the ECB meeting is that EUR/USD remains within its approximate range of 1.6350-1.7800. Yet that still leaves potential opportunities for those looking for smaller moves.

EUR/USD is trading below 1.0700 and the weekly pivot point ahead of the European open, so today’s bias remains bearish as it tops out as resistance. Lows around 1.0650 would become our downside target, where bulls may look to enter as part of a range-trading strategy ahead of the ECB meeting. Conversely, a break above yesterday’s high today returns us to a short-term bullish bias and puts 1.0750 in focus. While a disappointing ECB meeting coupled with (more) strong US inflation could see the EUR/USD reverse after breaking out of the range.

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