ECB preview: Not yet ready for the beach break
The ECB is expected to maintain its current interest rate, but a surprise hike is not off the table, as geopolitical tensions and rising energy prices create a more complex economic backdrop. Per the full note from ing-think, recent developments could lead some members of the ECB to reconsider their stance as inflation pressures resurface. The desk believes that the governing council's cautious approach might be challenged if data continues to signal persistent inflation, which could play into decision-making dynamics ahead of summer recess.
What the desk is arguing
The ECB is likely to keep rates steady in its upcoming meeting, but emerging inflationary pressures from increased energy costs may sway policymakers towards another hike. According to the commentary by ing-think, the geopolitical situation and fluctuating oil prices have altered the landscape for the central bank's deliberations on rate adjustments.
The recent behavior of energy prices echoes the macroeconomic conditions observed in early June, with significant instability since the last rate change of 25 basis points. Policymakers may appreciate that current inflation signals warrant a revisitation of the rate hike trajectory.
Where it sits in our coverage
Our consensus target for the EUR/USD stands at 1.075, with a range from 1.04 to 1.12. Notably, jpmorgan has positioned its March 2026 target at 1.10, while bofa has a more conservative outlook with a target of 1.04.
This perspective aligns with the broader consensus, indicating sensitivity to ongoing developments in European economic indicators and geopolitical events. However, with other firms potentially advocating for aggressive rate hikes contingent on inflation data, the desk's moderate stance sits closer to the upper end of the spectrum.
How other firms see it
Several firms, including jpmorgan, appear aligned with this more cautious position regarding rate adjustments, while bofa stands in contrast with its lower targets.
Given this dynamic, the EUR/USD pair may be influenced by changing expectations surrounding ECB policy actions, particularly in response to the shifting inflation landscape. The trajectory of energy prices, along with the ECB's communications, will be crucial in shaping near-term market behaviors.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01ECB is likely to hold rates, but a surprise hike is possible amid rising inflation risks.
- 02Geopolitical tensions and oil prices heavily influence ECB's policy considerations.
- 03Consensus is around 1.075 for EUR/USD, with divergence in firm targets indicating varying outlooks.
Market implications
Traders should watch the EUR/USD pair for movement around the 1.075 mark, as any shifts in sentiment related to ECB policy could lead to volatility. Monitoring upcoming geopolitical developments and energy price trends will be crucial.
Risks to this view
A marked reversal in energy prices or a significant escalation in geopolitical tensions could challenge the ECB's cautious stance and prompt a more aggressive monetary policy response. Should inflation metrics spike unexpectedly, this would likely force the ECB's hand towards tightening sooner than anticipated.
Articles ECB preview: Not yet ready for the beach break Published 05:10 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download While we expect the European Central Bank to stay on hold next week, a surprise hike should not entirely be ruled out Carsten Brzeski Christine Lagarde, President of the ECB, which is likely to keep rates unchanged next week, but we don't rule out a surprise rate hike Just weeks ago, the 23 July ECB meeting looked like a formality — the last stop before summer break, the one meeting no one would have missed had it been cancelled at the last minute. However, the new escalation in the Middle East and the renewed rise in energy prices have changed the picture once again. Instead of gradually transitioning into summer vacation mode and postponing any rate decision until after the summer, some ECB officials might actually be inclined to push more forcefully for another rate hike.
Oil prices on a roller-coaster ride Since the 11 June meeting, and the decision to hike rates by 25bp to 2.25%, the external environment, including energy prices, has been on a roller-coaster ride. The late-June ECB conference in Sintra confirmed the macro backdrop of the central bank’s base-case scenario and highlighted policymakers' determination to continue hiking rates. But the subsequent drop in energy prices to below pre-war levels likely removed doubts about a rate hike.
Now, with the renewed tensions in the Middle East and energy prices rising again, these doubts will have disappeared again. Instead, a week before the next ECB meeting, the macro backdrop looks very similar to the one in early June. What does this mean for next week's meeting?
Remember that next week’s meeting will not come with new macro projections. Still, expect the ECB to have at least run an internal update of where the June projections currently stand, taking the latest oil price developments into account. With current energy prices, we are right back at the ECB’s base case scenario from June.
This is a scenario that was built on market assumptions: a total of at least two rate hikes, headline inflation gradually coming down over the course of 2027, and core inflation remaining slightly above 2% for the entire forecast horizon. Surprisingly slow inflation data in June and very little sign of indirect or even second-round effects should have taken away the urge to hike policy rates further. Still, the ECB’s base case scenario will be a clear argument in favour of yet another rate hike.
And not only in the base case scenario. The entire discussion about the ‘insurance rate hike’ actually also favours a second hike. Why?
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