ECB preview: What major banks and analysts expect from Lagarde and interest rates
The ECB is expected to raise interest rates by 25 basis points today, reaching a deposit facility rate of 2.50%. However, the real focus will be on President Lagarde's signals regarding future rate hikes, amidst mixed expectations from major banks. Per the full note , Barclays and Danske Bank believe that Lagarde will keep options open for further action without committing to any explicit guidance. With market attention turning towards inflation and energy prices, any signs of hesitancy from the ECB could shift sentiment in the EUR/USD pair significantly.
What the desk is arguing
The desk anticipates heightened volatility in EUR/USD around the ECB's interest rate decision. With Lagarde poised to provide a performance-focused update without clear forward guidance, market participants are keenly focused on the implications this has for future monetary policy. Per the full note , analysts are divided, with some expecting further tightening while others foresee a potential peak in rates at 2.50%.
The evidence shows that with oil prices nearing $100 per barrel and bond yields increasing, inflation risks are still pressing. This backdrop suggests the ECB may tread carefully, balancing the need for further hikes against the current economic landscape detailed by banks such as JP Morgan and Barclays.
Where it sits in our coverage
Our current consensus target for EUR/USD stands at 1.075, with a range between 1.04 and 1.12. Notable forecasts include: - jpmorgan: 1.10 by Mar26 - bofa: 1.04 by Mar26
The desk's view aligns with jpmorgan, maintaining optimism for the EUR despite potential fluctuations in response to ECB communications. This position sits comfortably within our consensus range, suggesting confidence in the ongoing monetary strategy.
How other firms see it
Several firms, including barclays and dansker, hold a view supporting potential further hikes, arguing that inflation risks require vigilance from the ECB. Conversely, firms like bofa anticipate a peak in the current tightening cycle, which could impact their trading strategies.
Traders should also consider the potential impacts on eurozone inflation indicators and energy markets, which are closely tied to the ECB's policy decisions and future rate expectations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01ECB to raise rates by 25 bps, reaching 2.50%
- 02Lagarde likely to avoid strong forward guidance
- 03Inflation and oil prices remain central to market focus
- 04Potential for increased volatility in EUR/USD
Market implications
Watch for potential shifts in EUR/USD as markets react to Lagarde's comments and the broader implications of inflation data. If explicit guidance on future rates is lacking, the 1.075 level in the EUR/USD pair could face significant testing.
Risks to this view
A reversal of this call could occur if inflation data comes in stronger than expected, prompting the ECB to signal a more aggressive stance on tightening than anticipated. Additionally, a sudden downturn in oil prices may alter the inflation outlook and the ECB's associated policy path.
The ECB looks all but certain to raise interest rates by 25 bps today, taking the deposit facility rate to 2.50%. So barring a major surprise, the rate decision itself is not where the real market interest lies. Instead, the bigger question is what comes next.
With oil prices running b ack up to $100 and bond yields pushing higher, there is a heated debate on whether today's move is going to be the final rate hike of the tightening cycle. As such, that puts ECB president Lagarde's guidance firmly in focus. Ahead of the decision, here is what some of the major banks and market analysts are expecting from the ECB.
Lagarde is unlikely to provide markets with a clear signal One area where analysts broadly agree is that Lagarde is unlikely to commit to another rate hike. Barclays expects Lagarde to present the September move as a sufficiently robust response to the current inflation risks, while stopping short of describing it as an "insurance hike". That would leave the ECB with maximum flexibility should inflation pressures worsen down the road.
Danske Bank takes a similar view, expecting Lagarde to reiterate the ECB's meeting-by-meeting and data-dependent approach rather than provide any specific forward guidance. JP Morgan also expects little in the way of explicit guidance, although the firm argues that the ECB's updated staff forecasts could effectively do the talking instead. In their view, the projections are likely to make a stronger case for further tightening. "The ECB is unlikely to give explicit forward guidance beyond this, sticking to its meeting-by-meeting and data-dependent approach.
There will, however, be a lot of what Lagarde has called “framework guidance”, especially via the staff forecasts. This is likely to show a clear case for raising rates further.” Barclays and Danske still think 2.50% will be the peak Despite the flexible approach, it does not necessarily mean another rate increase is coming. Barclays continues to expect the ECB to keep rates unchanged after September, with the deposit rate remaining at 2.50% through the end of 2027.
That being said, they do acknowledge the risks of that outlook changing amid the latest energy market developments - "particularly the rise in gas prices and the persistence of exceptionally high crack spreads". That could yet push the ECB into thinking that "a more restrictive policy stance may ultimately be required". For now though, that remains a risk rather than the firm's base case.
As for Danske Bank, the firm argues that there has so far been limited evidence of spillovers from energy into broader categories of inflation in the region. And in the absence of those second-round effects, they see little need for the ECB to push rates more meaningfully into restrictive territory. "We believe the lack of spillovers from energy to non-energy inflation means the ECB need not enter restrictive territory. We thus expect the ECB to keep the deposit rate at 2.50% from September in both 2026 and 2027." Deutsche Bank, JP Morgan and SocGen see another hike coming As we approach today's meeting, the more hawkish camp is becoming harder and harder to ignore.
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