ECB policymaker Kažimír says that a rate hike in June is all but inevitable
The desk views the ECB's trajectory as increasingly hawkish, with a June rate hike now nearly certain following comments from policymaker Kažimír. Per the full note source, the market has priced in an 81% probability of a 25 basis point increase, reflecting growing concerns over inflation driven by rising energy prices. This sentiment aligns with our consensus target of 1.075 for EUR/USD, as the market anticipates further tightening through the year. The divergence in views among ECB officials, particularly with Villeroy's more cautious stance, adds complexity to the outlook.
What the desk is arguing
The desk believes that the ECB is on a path toward tightening monetary policy, with a June rate hike becoming increasingly likely. Per the full note source, Kažimír's comments indicate a consensus among ECB officials that inflation pressures are mounting, necessitating action.
The current market pricing reflects this shift, with an 81% likelihood of a 25 basis point hike in June and nearly 99 basis points expected by year-end. This aggressive pricing suggests that traders are anticipating a robust response from the ECB to combat inflation, which is now seen as broad-based across the economy.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with a range of 1.04 to 1.12. Notably, jpmorgan has set a target of 1.10 for March 2026, while bofa is more conservative at 1.04 for the same tenor.
This perspective aligns with the broader market sentiment, as the desk's view is at the upper end of the consensus range. The tightening narrative is gaining traction, and the desk's positioning reflects this bullish outlook on the euro.
How other firms see it
Firms like jpmorgan and citi are aligned with the desk's hawkish view, anticipating further rate hikes from the ECB. Conversely, bofa and deutsche express caution, suggesting that the ECB may not act as aggressively as the market expects.
The trajectory of EUR/USD is closely tied to ECB policy decisions, particularly in light of the ongoing inflationary pressures. Additionally, the dynamics between the ECB and the Federal Reserve will be critical to watch as they navigate their respective monetary policies.
What the calendar says
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Higher energy prices bound to spread to the rest of the economy Policy tightening in June is all but inevitable Increasingly likely that Europe is facing a prolonged period of broad-based price increases It is a slight contrast to what Villeroy said moments earlier in that the ECB needs "critical mass of data" before beginning with rate hikes. That being said, just be reminded that Villeroy will be departing from the ECB and the French central bank in early June. So, perhaps he can be more bold in his commentary.
As for Kažimír, the comments sort of echo what the rest of his peers may be leaning towards. And at this stage, markets are also doing the tightening on their behalf already. A 25 bps rate hike for June is now ~81% priced in, with ~99 bps of rate hikes factored in by year-end.
The more hawkish tilt by the ECB is already starting to produce a response and that in itself may not necessarily be a good thing for the central bank. I highlighted last week how things are going to be very tricky for policymakers in Europe considering the current set of circumstances. The post: The ECB is stuck between a rock and a hard place This article was written by Justin Low at investinglive.com.
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