Are You Ready for the ECB Meeting Tomorrow?
Are You Ready for the ECB Meeting Tomorrow?
The 75bps or even a 100bps hike this Thursday will not necessarily lift the euro. Why? Because investors are focused more on the terminal rate than the short-term rate. The ECB, like most central banks, is fighting high inflation with aggressive rate hikes. Over the last few weeks, the ECB has been increasingly hawkish about the upcoming path of the ECB’s interest rate hikes. You can see that reaction in the German Bund as the yield has been pushing higher on interest rate hike expectations.
However, whether the ECB hikes by 75 bps (+90% priced into Short Term Interest Rate Markets) or 100bps the focus is on the new terminal rate and growth. So, does the ECB now expect GDP to fall into recessionary territory for 2023? In its July meeting, the ECB decided to raise the three key ECB interest rates by 50 basis points. However, the ECB noted that the eurozone economy was growing more slowly as high inflation, greater uncertainty, and the problems that firms are facing with getting supplies weighed on economic activity.
Lower growth, lower rates
If the ECB does project a recession for 2023, and there has been a sharp slowdown in activity recently, then this could result in markets seeing a lower terminal rate. This could weigh on the euro going even if the ECB hike by 100bps. So, a knee-jerk reaction in the euro higher could happen on Thursday before traders weigh up the medium-term outlook for the eurozone. The higher the likelihood of recession the more likely the euro will be to find sellers. A EURGBP sell bias could be attractive on a more dovish ECB. If the ECB sticks to what’s expected there is no obvious trade.
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