It may be The Day of the year for the European Central Bank (ECB). The ECB will reveal its latest economic projections, which will show the implications of the Ukrainian war on the economy, and the mounting pressure on consumer prices, especially due to soaring food and energy prices.
The ECB will likely announce a July rate hike at today’s meeting. But the hint of a July rate hike is not enough to boost the euro, as it is almost fully priced in. What’s left to price is whether the ECB would choose to raise the rates by 50bps to stop the euro depreciation, or whether it will opt for back-to-back interest rate hikes. The latter is more likely, based on Lagarde’s gradual approach to policy tightening.
The problem is, if the ECB decided to start tightening gradually, even back-to-back interest rate hikes may not do the job. The Bank of England (BoE) has been raising its policy rate sharply since the end of last year, but the back-to-back rate hikes didn’t prevent sterling from falling against the US dollar, and the pound barely gained against the single currency.
Euro needs a bold action
What the euro needs is a coup, a bold action from the ECB, to reverse its course, especially against the US dollar. And a stronger euro is the first step in controlling the soaring inflation in Europe. If nothing, the energy purchases, which are negotiated in USD terms, would be ‘cheaper’ for the Europeans and have a cooling effect on consumer prices.
Unless the ECB’s almost certain July rate hike hint isn’t complemented with a whole bunch of super hawkish comments – that would overshadow the ugly economic indicators and the fear of a significantly slowing economic activity, it won’t do much to boost the euro from the actual levels.
Nobody said it was easy
Unfortunately, Christine Lagarde won’t go down in history as the saviour of the Europeans as Mario Draghi did. Mario Draghi ordered free drinks for everyone, and Christine Lagarde needs to pay the bill.
If the ECB doesn’t get seriously hawkish, the EURUSD will certainly hang around the actual levels, a touch lower than the minor 23.6% Fibonacci retracement on last year’s depreciation. But If Christine Lagarde decides to take the reins of the market in her hands, we should see the EURUSD continue pushing toward the 1.10 level in the medium run.
It all depends on the ECB’s next move. It won’t be easy to withstand the fearless Federal Reserve (Fed) that throws fearless hawkish comments to the market now and walks the talk. Activity on Fed funds futures price in nearly 95% chance for a 50bp hike by the Fed at next week’s meeting.
Relentless oil rally boosts Fed hawks
The US dollar remains strong as the US 10-year yield is again above the 3% mark as the relentless rally in oil prices revive inflation fears and the Fed hawks before Friday’s inflation read. The barrel of US crude advanced to $123.50 yesterday.
