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Markets Expect Many Rate Hikes from the ECB, But EUR/USD Daily Chart Doesn’t Agree

Posted Wednesday, June 29, 2022 by
Skerdian Meta • 2 min read

Most major central banks have gone into a frenzy of interest rate hikes since late last year, apart from the Bank of Japan (BOJ) and the European Central Bank (ECB). Although the latter is expected to start raising rates next month, the BOJ is at a more comfortable place as CPI (consumer price index) inflation remains at reasonable levels. The odds of the ECB going into a frenzy after the first hike are increasing, as inflation keeps surging.

MUFG Research discusses the ECB policy outlook and argues that the rate market is ahead of itself in pricing an aggressive tightening cycle from the ECB over the coming year. “We continue to believe that the European rate market is pricing in too much tightening from the ECB in the year ahead in light of downside risk to the growth outlook. The European rate market has recently scaled back rate hike expectations but is still pricing in 150bps of hikes by year end and 225bps hikes by this time next year.

On the other hand, the ECB still feels hesitant to commit to such a policy. Lagarde made some soft comments yesterday:

Commitment to rate hikes is data dependent
Intend to raise rates by 25 bps in July
There is an optionality to raise by more in September
If inflation we will have sufficient information to move faster
Beyond September, a “gradual but sustained” path of further rate increases will be appropriate
In addressing fragmentation, ECB will use flexibility in reinvesting redemptions coming due under PEPP
Also decided to accelerate the completion of the design of a new instrument
The new instrument will have to be effective, while being proportionate and containing sufficient safeguards to preserve sound fiscal policy
Full speech

EUR/USD Daily Chart – Is the Larger Bearish Trend Resuming?

The 50 SMA pushing EUR/USD down

So, I guess the Euro is going with the market view of a slower rate hike pace. This pair has been on a bearish trend for more than a year and the downtrend has picked up pace as well in recent months, although this is partly due to the USD strengthening. Yesterday we saw a reversal down after another rejection by the 50 SMA.