(Giles Coghlan LLB, Lth, MA – HYCM)
The 75bps or even a 100bps hike this Thursday will not necessarily lift the euro. Why? Because investors are focused more on the terminal rate than the short-term rate. The ECB, like most central banks, is fighting high inflation with aggressive rate hikes. Over the last few weeks, the ECB has been increasingly hawkish about the upcoming path of the ECB’s interest rate hikes. You can see that reaction in the German Bund as the yield has been pushing higher on interest rate hike expectations.
However, whether the ECB hikes by 75 bps (+90% priced into Short Term Interest Rate Markets) or 100bps the focus is on the new terminal rate and growth. So, does the ECB now expect GDP to fall into recessionary territory for 2023? In its July meeting, the ECB decided to raise the three key ECB interest rates by 50 basis points. However, the ECB noted that the eurozone economy was growing more slowly as high inflation, greater uncertainty, and the problems that firms are facing with getting supplies weighed on economic activity.
Lower growth, lower rates
If the ECB does project a recession for 2023, and there has been a sharp slowdown in activity recently, then this could result in markets seeing a lower terminal rate. This could weigh on the euro going even if the ECB hike by 100bps. So, a knee-jerk reaction in the euro higher could happen on Thursday before traders weigh up the medium-term outlook for the eurozone. The higher the likelihood of recession the more likely the euro will be to find sellers. A EURGBP sell bias could be attractive on a more dovish ECB. If the ECB sticks to what’s expected there is no obvious trade.
King dollar feeds off aggressive Fed
(Han Tan – ForexTime (FXTM))
King dollar’s scorched-earth ascent to a fresh 20-year peak has clobbered broad swathes of global financial markets, with dollar-denominated assets clearly bearing the brunt. Spot gold has returned into sub-$1700 domain, Brent futures have tumbled to their lowest since February, while bitcoin is on the cusp of erasing almost all of its summer gains.
The greenback has clearly fed off the palpable anguish surrounding a Fed that’s now persistently ultra- aggressive in its battle against multi-decade high inflation. The risk aversion that’s coursing through markets also suggests that global stocks could move much further to the downside over the immediate term, with the FOMC apparently still far from reaching peak hawkishness.
Such angst has also left the buck’s major peers flailing in the greenback’s wake. The pound is hurtling towards its lowest levels since the onset of the pandemic, the yen is trading around levels not seen since 1998, while the euro is extending its path south of parity.
Hawkish ECB to offer little solace for euro
Even ultra-hawkish rhetoric emanating out of the ECB tomorrow isn’t likely to be much of a saving grace for the beleaguered euro. Despite the 65% chance currently priced for a 75bp hike by the ECB on Thursday, markets may see beyond such a supersized move as just front-loading of its intended rate hikes. The ECB’s policy tightening plans may ultimately be curtailed by the depressing outlook for the Eurozone.
Should the ECB instead surprise markets with a relatively dovish 50bp hike tomorrow, that might even open the floor below 0.98 for EURUSD.