What to expect from the ECB later today and how will the euro react?

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The ECB already pre-committed to a 25 bps rate hike today and they will certainly deliver on that. There will be no surprises on that front and markets have already fully priced in such a move. As such, the decision in itself isn’t what is going to be what traders will be reacting to. Instead, it is about the communication for the September meeting.

So, what can we expect from the ECB on that front?

I’ve mentioned already in a few posts earlier and I will say it again. I would not hold high hopes for the ECB to suggest that a rate hike in September is the most likely decision that they are leaning towards. And by ECB, I mean Lagarde’s press conference later.

There might be reports coming out after the decision which could signal some conflict about being more explicit but don’t expect that to be the case when Lagarde is putting it all out on the line later today.

She should just reaffirm that there have been positive developments on inflation and that they are going to be more data dependent after the summer. I mean, it’s only prudent to do so after having seen the abysmal PMI data for July and also loan demand being crushed amid a looming credit crunch.

As such, there is reason for the ECB to step back and perhaps monitor the situation in the weeks/months ahead.

The more hawkish members will certainly feel compelled to talk up the possibility of a rate hike but if the June to July period is any indication, they may have their hands tied to explicitly make such a call.

And if so, I reckon the euro may be in for a bit more of a disappointment in reaction to the ECB later. Looking at money market pricing, there is roughly 45 bps worth of rate hikes priced in for today and September. That indicates that on the balance of things, there is more potential for a downside shift in pricing rather than any upside extension.

However, if Lagarde comes on strong about their conviction to battle inflation and brushes aside the recent economic concerns, that might still spark a tentative rally in the euro. Although I would say that the scope for gains would be quite limited.

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

Go to Forexlive

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