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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 clues on the next ECB’s move, what the ECB’s reaction function will be and how the Governing Council is viewing the current situation.Since the last ECB meeting, the economic data confirmed the expected increase in headline inflation due to the energy shock and the negative impact on growth. Today, we will get the Eurozone Flash CPI for April where headline inflation is expected to increase further but with still limited impact on the core measure.The latest ECB’s SAFE survey showed rising inflation expectations in the short-term but no impact on the long-term outlook. Wage growth expectations have also moderated to 2.8% vs 3.1% in the prior quarter. We recently saw further deterioration in the Flash Services PMI for April which fell to a 62-month low, while Manufacturing PMI was artificially boosted by stock-building with weak underlying details. What caught everyone’s eye was of course the inflation section. The agency noted that “inflationary pressures continued to strengthen, with both input costs and output prices rising at the sharpest rates in more than three years amid the impacts of the war in the Middle East”.If we look at the ECB commentary leading up to today’s decision, President Lagarde recently said that they are between the baseline and adverse scenario and that the ECB doesn’t have a tightening bias. ECB’s Schnabel, who’s generally the most hawkish member when there are inflation risks, said that the ECB is not in a rush and can afford to take time to analyse better the current shock.Given the economic data and the recent ECB commentary, there’s a risk of disappointment for the hawks. The market is pricing 80 bps of tightening by year-end with an 87% probability of a rate hike in June. It’s going to be hard for Lagarde to “outhawk” market’s expectations, so just a less hawkish tone and a more measured approach to rate hikes could weigh on the euro. Even if Lagarde pre-commits to a rate hike in June, the upside in the euro is unlikely to be sustained given the already strong hawkish pricing.
This article was written by Giuseppe Dellamotta at investinglive.com.
💡 DMK Insight
The ECB’s decision to hold rates at 2.00% is a signal of cautious optimism amid economic uncertainty. Traders should pay close attention to the press conference for hints on future rate adjustments. The ECB’s ‘data-dependent’ stance suggests that upcoming economic indicators, particularly inflation and employment data, will heavily influence their next moves. If inflation remains stubbornly high, we could see a shift in tone that might lead to a rate hike sooner than expected. This could impact the euro’s strength against the dollar and other currencies, making forex pairs like EUR/USD particularly sensitive. On the flip side, if the ECB maintains a dovish outlook, it could lead to euro weakness, providing a potential buying opportunity for those looking to capitalize on a dip. Keep an eye on the 1.05 level for EUR/USD; a break below could signal further downside, while a bounce might indicate a bullish reversal. Watch for any comments on economic growth forecasts, as they could provide additional context for future monetary policy.
📮 Takeaway
Monitor the ECB press conference closely for hints on future rate changes, especially regarding inflation data and its impact on EUR/USD around the 1.05 level.
