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
British Pound Reports that the UK may cut its interest rates before the USA cut their interest rates were the final straw this past week for Sterling. A slew of less than helpful inflation, employment and finally retail sales saw GBP weaker , but then the suggestion that with the background of that less than […]
Texas, USA The third largest citrus state in the USA after California and Florida is Texas. Currently the citrus crop is under threat in Texas due to chronic water shortages owing to a long running dispute with Mexico over delivery under a 1944 treaty whereby Mexico is supposed to deliver “1.75 million acre feet of […]
Coal tinted spectacles If you had to boil down the global economy into one category from the options of bad/fair/good, what would you choose? We all experience the economy vastly differently down to an infinite number of variables. But by and large the current phase we are in, characterised by strong global growth rates, record […]