ECB preview: a hawkish hold is expected but there's risk of a disappointment
At a Glance
The European Central Bank (ECB) is poised to maintain its policy rate at 2.00% amid a backdrop of rising inflation and mixed economic signals, suggesting a cautious approach moving forward. Per the full note source, the ECB's forward guidance is expected to remain non-committal, emphasizing a data-dependent stance. Market participants are particularly focused on the press conference for insights into the ECB's reaction function, especially given the recent increase in headline inflation driven by energy prices. The market is currently pricing in 80 basis points of tightening by year-end, with a high probability of a June rate hike, which may lead to disappointment if the ECB adopts a less hawkish tone than anticipated.
Full Analysis
What the desk is arguing
The desk believes that while the ECB is likely to hold rates steady today, the potential for a less hawkish tone could weigh on the euro. This perspective is supported by the recent economic data, including a deterioration in the Flash Services PMI and a modest rise in wage growth expectations to 2.8% from 3.1%. Per the full note source, the ECB's recent commentary suggests a cautious approach, with President Lagarde indicating the bank is not in a rush to tighten policy.
The economic backdrop shows rising inflation expectations, particularly in the short term, but with limited impact on the long-term outlook. The Flash CPI data for April is expected to show further increases in headline inflation, yet core inflation remains stable, indicating that the ECB may not feel pressured to act aggressively. This nuanced view creates a risk of disappointment for hawkish market participants who are betting on a more aggressive tightening cycle.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns closely with jpmorgan, which reflects a similar outlook, while it diverges from bofa, which is positioned at the lower end of the range. The desk's call sits at the upper bound of the spread, indicating a more optimistic view on euro strength relative to some peers.
How other firms see it
Firms like jpmorgan and citi are aligned with the expectation of a cautious ECB, anticipating that the central bank will maintain its current stance while monitoring economic data closely. Conversely, bofa holds a more bearish outlook, suggesting that the euro may face downward pressure in the near term.
Traders should also keep an eye on related currency pairs such as EUR/GBP and EUR/JPY, which may reflect broader market sentiment towards the euro in light of ECB decisions and economic data releases.
What the calendar says
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From the original
The European Central Bank is expected to maintain its policy rate at 2.00% today and keep the non-committal forward guidance by following a “data-dependent" and "meeting-by-meeting" approach. The focus will be mainly on the press conference where market participants will look for
Related speeches
4 itemsECB preview: forget the rate hike and focus on forward guidance
Rates Spark: Bracing for a hawkish ECB
The European Central Bank (ECB) is poised for a 25 basis point rate hike today, supported by a hawkish narrative that suggests limited potential for additional aggressive moves. Per the full note from ing-think, expectations are tempered as the market already prices in three hikes, which may represent an overextension of hawkish sentiment, given that inflation pressures have not yet shown second-round effects. The recent ECB commentary implies that while a hawkish tone will be maintained, any surprises beyond today's hike are off the table unless inflation data signals otherwise.