We’ve talked here about how if the ECB doesn’t hike today, they will have to sell a hawkish pause instead. And that itself seems like a daunting task for the central bank. But what happens if the ECB does follow through with the leak earlier this week and hike rates by 25 bps? Is that a good enough case for the euro to strengthen? Let’s discuss.
The odds of a rate hike for later today now stand at ~65% and that comes after a report earlier this week suggested that the ECB will bump up its inflation projections, building the case to communicate one last rate hike today.
The thing is, that is precisely what markets are also pricing in – that being the ECB only has one more rate hike to go at best. That to me says that there isn’t much more upside potential in terms of rates pricing as this would be about as good as it gets for the euro, in terms of benefiting from a more hawkish ECB outlook.
Either way, the central bank is going to try and convince markets of the narrative that they are going to stick with more restrictive monetary policy for a sufficient and considerable period of time. But can they really?
With every passing economic data, we are continuing to see recession risks build across the euro area. And with tighter credit conditions, it’s not making it easy for the ECB to try and navigate a soft landing.
Policymakers had previously said that the economy would hold up well enough, before acknowledging a slowdown and now saying that a soft landing is likely amid growing economic risks – especially in Germany. It won’t be long before we see talks of a shallow recession and then perhaps having to acknowledge that the downturn may actually be deeper than anticipated.
They are always lagging behind the reality, so that isn’t new. But for markets, the fact that euro area data continues to be in the dumps means that they are not going to be convinced of whatever the ECB is trying to sell.
So, unless that changes, it will be a tall order for the euro to sustain any jump higher from the ECB decision today. There might be a euro rally on a more hawkish undertone by Lagarde & co. in the short-term. However, that’s one that I would have quite a decent conviction to sell into – as long as US and Eurozone economic data continue to highlight a stark contrast.
And I’m sure that’s what traders are seeing as well. The first point in the EUR/USD to watch on any bounce is the 1.0800 mark before getting to the 200-day moving average at 1.0827 and then the 100-day moving average at 1.0898. That lays out quite a number of key hurdles for the euro to get past, just to convince of a potential turnaround in sentiment.
In other words, the path of least resistance still favours the downside momentum – at least for now.