File image of ECB President Lagarde. Photo: © Angela Morant/ECB
Euro exchange rates look to the European Central Bank for support, but they might find it lacking.
The ECB decision on Thursday will bring with it a rate hike of 25 basis points as it seeks to get on top of persistently high energy prices that threaten to trigger an unwelcome inflationary cycle.
The rate rise is expected by foreign exchange markets and, in isolation, is therefore unlikely to shift the euro. This means the real market-mover of the day will be whether or not the ECB signals it's willing to hike again and this is the start of a true hiking cycle.
For analysts at UBS Wealth Management, Thursday's signalling could prove 'dovish' for the euro.
"Weaker-than-expected macro data in the Eurozone need to be considered as well. We think this makes the first hike a dovish one," says UBS in a recent note.
As a result, analysts at the Swiss outfit expect euro-dollar to hover around 1.16 this week, with a bias toward 1.15 given robust U.S. economic data (watch U.S. inflation numbers on Wednesday).
Above: EUR/USD stabilises above 1.15 in the countdown to Thursday's ECB call.
On the day, ECB President Christine Lagarde's press conference will be key to determining the tone of the event, and analysts at Lloyds Bank say it should contain inferences into when/if a follow-up rate hike will be delivered.
"Absent exceptionally dramatic short-term developments in the intermeeting period, there does seem to be a rationale to focusing on new quarterly staff forecast months when the scenario analysis can be assessed in detail. That makes September the next diary date for a rate hike," says Lloyds.
The market is presently priced for around 65 basis points of interest rate hikes in the coming six months. That's a little more than two hikes.
How that expectation shifts in the coming days could well influence the euro: if expectations retreat in the wake of Thursday's decision and guidance, the euro can come under pressure.
"We think the ECB's current priority is solidifying markets' expectations on further tightening to hedge against inflation expectations de-anchoring. Our baseline is therefore a hawkish hike, with some indications the bank is prepared to raise rates again," says a note from ING Bank.
If ING is correct, then interest rate expectations would settle in a euro-supportive manner, and potentially guide the single currency higher into the weekend.
