ECB policymaker Makhlouf says concerned about energy prices staying higher for longer
The desk anticipates a more hawkish stance from the ECB in light of rising energy prices and inflation concerns. Per the full note from Justin Low, ECB policymaker Makhlouf expressed worries that energy prices may remain elevated due to ongoing geopolitical tensions, particularly in the Middle East. This situation could lead to cost-push inflation, prompting the ECB to consider 'insurance' rate hikes to maintain credibility and manage inflation expectations. With the consensus target for EUR/USD at 1.075, the market is closely monitoring these developments as they unfold.
What the desk is arguing
The desk posits that the ECB is likely to adopt a more aggressive monetary policy stance in response to persistent inflationary pressures driven by higher energy costs. Per the full note, Makhlouf's comments underscore the urgency for the ECB to monitor inflation expectations closely, as prolonged high energy prices could lead to de-anchoring.
The potential for 'insurance' rate hikes could see the deposit rate facility rise to between 2.25% and 2.50%, a move designed to provide leeway for further adjustments if necessary. This aligns with the ECB's need to balance economic growth with inflation control, especially if the geopolitical situation remains unresolved.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with a range of 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with jpmorgan, which shares a similar outlook on the ECB's potential rate hikes, while bofa takes a more cautious stance at the lower end of the range. The desk's call sits at the midpoint of the consensus spread, reflecting a balanced view of the current economic landscape.
How other firms see it
Firms like jpmorgan and citi are aligned in their expectations for a hawkish ECB response, suggesting a consensus on the need for proactive measures to combat inflation. Conversely, bofa remains skeptical, advocating for a more conservative approach given the uncertain economic environment.
Key currency pairs to watch include EUR/USD and GBP/USD, as their trajectories will likely reflect the ECB's decisions and the broader market sentiment regarding inflation and energy prices.
What the calendar says
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Key takeaways
- 01ECB likely to adopt a hawkish stance due to rising energy prices.
- 02Inflation expectations are at risk of de-anchoring, prompting potential rate hikes.
- 03Consensus target for EUR/USD is 1.075, with a range of 1.04 to 1.12.
- 04Market is closely monitoring geopolitical developments in the Middle East.
Market implications
Traders should watch for potential ECB rate hikes that could influence EUR/USD movements, particularly if energy prices remain elevated. A break above 1.08 could signal increased bullish sentiment, while a drop below 1.05 may indicate a shift in market expectations.
Inflation expectations need to be closely monitored for signs of de-anchoring Worried that energy prices may stay higher for longer without a clear timeline for end to Middle East conflict Will be paying close attention to indirect effects of higher energy prices That being how it contributes to cost-push inflation in production, transportation, services Potential second-round effects via wages will take longer to show up given staggered nature of wage-setting in Europe He's not giving anything away just yet but markets are still going to take on a more hawkish view on the ECB after the events yesterday. The remarks above pretty much sum up how policymakers are viewing the situation but the fact remains that they have to do something about it one way or another. Whether it be to not take action on interest rates (thus, loosening financial conditions as markets have already priced in rate hikes) or choosing to be more proactive in raising rates (do they have to do more than just a token gesture?).
I reckon the way the ECB is going to frame all of this is that they will do some "insurance" rate hikes in the coming quarter(s). That especially if the Middle East conflict drags on for at least another month. That way, the deposit rate facility goes back up to around 2.25% to 2.50% - which in their definition will be just marginally above neutral territory.
So, that gives them some leeway to go bigger if need be but also argue that rates are not too restrictive so that it chokes the economy. They just have to find the right spin to it. Unfortunately, that's the job now.
This article was written by Justin Low at investinglive.com.
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