Time to double down?
A rate hike at the ECB next week looks like a foregone conclusion. The only question remaining is whether the bank decides to opt for a 25 or 50 basis point adjustment to its key monetary policy facilities. There is likely to be increased Euro volatility moving into the event. However, the next two-to-three trading sessions could avoid this volatility as investors await Tuesday’s bank lending survey and the latest set of Euro area inflation data. So far analysts and futures pricing show a relatively even split between a single or double hike next week. Which direction the ECB moves in could have a significant influence over whether EURUSD manages to sustain its so far confident break of 1.10.
Due to the structure of the ECB’s governing council and the requirement to include all Euro area nations within the decision making framework, we have had a lot of contrasting voices from within the Bank itself. Inflation is of course not symmetrically spread throughout the member states and as such different policy makers have espoused considerably different views on where policy should move. The key differentiating logic within the Council depends on members’ answers to the following question: has, and if so at what point did, a supply side inflation problem become demand led.
The universal response regarding the start of this current inflation upward cycle was the war in Ukraine. Weak supply chains post-Covid were not resilient enough to cope with the shock setback in relations from a key commodity exporting region of the world, so the story goes. However, an increasingly demand-driven narrative to inflation has emerged. Those that believe inflation has and will continue to be driven by excess demand are pushing towards a 50-basis point hike. Those that continue to see supply, including even labour supply as the source of the rising price level, are opting for a more gradual approach to tightening.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Morning Brief – Rather you than me, Christine
Charles Porter
Thu 7 Dec 2023
Rather you than me, Christine As we and the market alike have been speaking about recently, Eurozone rates are all the rage. As we highlighted yesterday, the path for rate cuts next year has already captivated the market with easing being forecasted as early as Q1 2024. As we approach the Christmas period, we must […]
Morning Brief – European Interest Rates
Humphrey Percy
Wed 6 Dec 2023
European Interest Rates More momentum on rate cuts in the Eurozone as expectations grew for cuts starting in March and totalling 140bps in 2024. Equally in the UK cuts of 130bps starting in June are being pencilled in to market calendars. What this means is that GBP/EUR is looking more than especially good value at […]
Morning Brief – Eurozone
Humphrey Percy
Fri 1 Dec 2023
Eurozone That was a surprise: yesterday the EU announced that inflation had fallen to 2.4% which was considerably better than the 2.7% that markets had expected. Despite the ECB saying it was far too early to cut rates, the market has pencilled in the first cut for April. Before getting carried away it should be […]
