<p style=““ class=“text-align-justify“>The general line of thinking is that markets could possibly fall apart if the ECB goes with a 50 bps rate hike today. That comes of course after all the concerns of a banking crisis this week, which started from Silicon Valley Bank’s collapse to Credit Suisse’s capital distress.</p><p style=““ class=“text-align-justify“>The fact that <a target=“_blank“ href=“https://www.forexlive.com/news/what-does-the-market-pricing-say-about-credit-suisse-right-now-20230315/“ target=“_blank“ rel=“follow“>CDS swaps</a> in the latter were showing that the underlying scenario is akin to a „this is not a drill“ type of situation shows how worried markets have been this week over a breakdown in the global financial system. </p><p style=““ class=“text-align-justify“>Now, Credit Suisse has already tried to address its issues through a CHF 50 billion borrowing and some creative financial chemistry (as noted <a target=“_blank“ href=“https://www.forexlive.com/news/this-is-the-only-thread-you-need-to-understand-what-credit-suisse-is-doing-20230316/“ target=“_blank“ rel=“follow“>here</a>). But it remains to be seen if that is enough to turn the tide in markets.</p><p style=““ class=“text-align-justify“>Essentially, we are in a place where the longer it is that there is no bad news, that in itself is good news. As such, the timing of the ECB policy decision is a rather unfortunate one for policymakers. Now, they can’t just focus on what they have to do but take into account the market’s „feelings“.</p><p style=““ class=“text-align-justify“>If you were to have written an ECB preview before yesterday and arguably before European trading today, it would have been ripped up. I would say even <a target=“_blank“ href=“https://www.forexlive.com/centralbank/barclays-forecast-for-the-european-centralbank-meeting-today-is-a-25bp-rate-hike-20230315/“ target=“_blank“ rel=“follow“>Barclays‘ latest call</a> this morning for a 25 bps rate hike is pretty much invalid now.</p><p style=““ class=“text-align-justify“>Considering how markets have digested the mood music in European trading, I’m even more convinced that the ECB will go with a 50 bps rate hike later today.</p><p style=““ class=“text-align-justify“>They’ve made that clear in the sense that going up against inflation is their number one concern and with core inflation still running rampant in the euro area, there is no reason to back down – at least from this argument. Besides that, they have already in a way committed to this by telling markets that they would so for quite a while now.</p><p style=““ class=“text-align-justify“>If they were to relent, it would practically call into question their resolve and their entire policy in communicating with markets. The backlash that Lagarde will face in her interview would be immense.</p><p style=““ class=“text-align-justify“>But another reason why I think that they would stick with their call for a 50 bps rate hike is that they can address any market concerns in a confident and yet elegant manner, while delivering on tighter policy.</p><p style=““ class=“text-align-justify“>As mentioned earlier, the simplest step would be to adjust TLTRO terms and delay early repayments from banks. In that sense, they can roll them over to a later date and keep liquidity conditions sufficient and just kick any QT talks down the road for now.</p><p style=““ class=“text-align-justify“>There might yet be other tools but I would assume that policymakers will not see fit to disclose them or think about them too much now as the situation in markets is rather fluid. However, they should reinforce the notion that they will stand ready at any point in time to step in and shore up confidence in the banking sector, if need be.</p><p style=““ class=“text-align-justify“>Put those two elements together and a bend but don’t break reaction in markets is what the ECB can hope for later today.</p><p style=““ class=“text-align-justify“>As for the reaction in the euro, I would say that there is scope for an upside move with a 50 bps rate hike should markets be able to take that in with stride and not revert back to a risk-off wave.</p>

This article was written by Justin Low at www.forexlive.com.