The ECB meeting next week will be a peculiar one, with a risk of no market reaction. On the one hand, the decision has already been well telegraphed (25bp hike and APP reinvestments to end from 1 July) and on the other hand guidance (with new staff projections) is likely a ‘one-sided’ risk for markets. Hawkish tunes from Lagarde on the back staff projections is at risk of being largely disregarded by markets.
ECB’s stance and market pricing are more harmonious for policy hikes than what we have seen during the past year and after the June meeting we find it challenging for markets to price in more than 40bp of additional until we get close to the July meeting.
We continue to expect ECB to hike to 4% by September, but risks may be slightly skewed to 3.75% in July as the burden of proof have been reversed. We expect ECB to guide for further tightening although providing a non-committal statement as they stay data dependent.