Will We See the Same Scenario in the Euro As We Saw in the USD Yesterday?

The Euro has been bullish against the USD for many months, as markets have been expecting the FED to stop interest rate hikes, while the European Central Bank has been quite vocal about continuing to raise interest rates. But, that lasted until a few weeks ago and since then ECB members have been sort of quiet, as the economy of the Eurozone is really feeling the pressure from such a steep policy tightening, at a time when inflation has come from abroad.

The ECB is anticipated to raise its interest rates by 25 basis points (bps), bringing the deposit rate to 3.75% while the main refinancing rate is expected to reach 4.25%. This rate hike has been discussed and expected since the last ECB meeting, so that’s not a surprise and markets will largely ignore it like they did with the FED hike yesterday.

ECB President Lagarde has already indicated that inflation is projected to remain at elevated levels for an extended period, and the central bank believes there is still more progress needed to address the situation. But, inflation has been slowing in the Eurozone as well, which should leave the ECB less hawkish. Various ECB speakers have consistently reiterated their intention to implement the rate hike at the July meeting, with the focus shifting to the September decision, which will be more dependent on incoming economic data.

So, we think that it is unlikely that there will be a specific commitment or indication by the ECB of future rate moves at this meeting, particularly due to the softening economy, with manufacturing and services falling deeper into recession in June, as last week’s PMI reports showed. Instead, the ECB is likely to emphasize its reliance on economic data so it is likely that we see a similar price action in the Euro today as we saw in the USD yesterday.

EUR/USD Live Chart