On Thursday, the European Central Bank is likely to raise interest rates by another 25 basis points.
How could the decision affect euro prices?
Here are the important points you need to know before working on your trading plan:
Focus on the event:
European Central Bank (ECB) Monetary Policy Statement
When will it be released:
June 15, Thursday: 6:00 PM GMT
ECB President Lagarde will give a talk in 30 minutes.
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- ECB’s Lifts Refinance rates by 25 basis points to 4.00%.
- ECB President Lagarde is likely to expect that the fight against high inflation is far from over and that there is room to signal further rate hikes before considering any pause.
Related Eurozone data since the last ECB statement:
🟢 Arguments for Tight Monetary Policy / The Rise of the Euro
on June 7th Member of the Executive Board of the European Central Bank, Isabelle Schnabel He pointed to an increase in interest rates in the future with continued high inflation rates
on June 6th Member of the Governing Council of the European Central Bank He said that because of rising energy costs, it will be difficult to bring down consumer inflation rates
on June 5th Lagarde He said “There is no clear evidence that core inflation has peaked“
HCOB Germany PMI Services For the month of May: 57.2 vs. 56.0 previously; “Rising costs and elastic demand lead to steady price inflation for services“
The unemployment rate in the eurozone In April 2023: 6.5% as expected vs. 6.6% previously
Producer prices in Germany Index in April: +0.3% m/m vs. -1.4% m/m previously
Bundesbank May 2023 report: “Inflation fell significantly in March due to the underlying effectHe sees underlying price pressures will remain elevated in the next few months
On May 19th Lagarde He said that the central bank is at a critical moment where inflation is slowing, but that “high and sustainable interest rates” are needed.
Read the final CPI for the month of april: in line with +7.0% yoy forecast and above +6.9% yoy prior read; Core CPI was in line with expectations of 5.6% and down from 5.7% previously
On May 12th Vice President of the European Central Bank in Guindos He said he had doubts about whether or not core inflation would ease; He says there may be more interest rate hikes in the future
🔴 Arguments for a looser/bearish monetary policy for the euro
Eurozone gross domestic product For the first quarter of 2023 (third estimate): -0.1% qoq (0.1% qoq forecast; -0.1% qoq prior); Employment increased +0.6% qoq (final estimate) vs +0.6% qoq expected and +0.3% qoq prior
German industrial production It rose 0.3% m/m versus an expected rise of 0.7% in April, the previous reading was revised from a 3.4% decline to a 2.1% decline.
Factory orders in Germany It fell 0.4% month over month in April, which is less than March’s decline of 10.9% upwardly revised and the expected decline of 2.2%.
HCOB Eurozone Services PMI In May: 55.1 compared to 56.2 in April; Input price inflation slowed to a 28-month low
annual inflation in the eurozone (May flicker estimate): 6.1% yoy (6.5% yoy expected) vs. 6.7% yoy prior
HCOB Germany Manufacturing PMI For the month of May: 43.2 (the lowest reading in three years), compared to 44.5
HCOB Eurozone Manufacturing PMI In May: 44.8 compared to 45.8 in April; Surveys have shown a sharp decline in new orders and factory output; Recruitment continues but at a slow pace
inflation in France Unexpectedly down -0.1% m/m in May vs 0.3% expected, up 0.6% in April
German GDP for the first quarter of 2023 The revision was revised from 0.0% to -0.3%, putting the economy into a technical recession after a fourth-quarter decline of 0.5%.
Flash Germany Manufacturing PMI In May: 42.9 vs. 44.5 previously; Services PMI at 57.8 vs. 56.0
Previous issues and the impact of the risk environment on the euro
May 4, 2023
Overlay the euro against major currencies Graphics by TV
Action / Results: The European Central Bank raised the main refinancing rate by 25 basis points to 3.75%, disappointing those who had hiked the rate by 50 basis points.
Lagarde noted in her press release that some members had already voted to raise interest rates by 50 basis points and that there was room for further rate increases.
It also reported that the central bank would stop reinvesting its asset purchase program (APP) in July, a move that would reduce the ECB’s portfolio by an average of €25 billion per month.
Choosing to raise interest rates by 25bp instead of the “usual” 50bp so soon after reports of slowing inflation and bank lending smelled a lot like “almost the end of the tightening cycle” to many traders.
Despite Lagarde’s upbeat remarks, the euro fell against the major currencies and remained near intraday lows until the end of the day.
The ECB’s decision came a day after what markets viewed as a “peaceful rally” for the Fed, making it easier for traders to spot another “peaceful rally” that week.
The Euro was also rallying in the days leading up to the decision, so a buy the rumor and sell the news scenario was on the table.
Risk Environment and Intermarket Behaviors:
Broad risk sentiment has turned negative, likely due to fresh signals from a potential global growth peak, most notably the move of China’s PMI into contraction territory, falling German retail sales, and a sudden uptick in US job cuts. Weak economic conditions in the Eurozone instead of hawkish rhetoric from the European Central Bank that week.
March 16, 2023
Euro pairs overlay: one-hour forex Graphics by TV
Action / Results: As expected, the ECB raised key refinancing rates by another 50 basis points to 3.50% in March.
ECB staff also released its latest forecasts (made before banking sector tensions reached a peak) showing headline and core inflation averaging 5.3% (from 6.3%) and 4.6% in 2023 respectively. Meanwhile, growth in 2023 was revised upward from 0.5% in December to 1.0% thanks to better-than-expected energy and “international environment” developments.
ECB President Lagarde said in her press release that the central bank will now rely on “data”. She also emphasized that the banking sector in the eurozone is “resilient”, and that the European Central Bank has the tools and facilities and is ready to respond “as necessary” if needed.
Risk Environment and Intermarket Behaviors: Concerns about Credit Suisse peaked days before the ECB’s decision, so assurances that the eurozone banking sector was “resilient” and that the ECB had the tools ready to deploy it helped calm banking tensions.
Higher interest rates in the Eurozone, along with an increase in confidence in the Eurozone banking sector, helped pull the Euro off its intraday lows. The single currency ended the day slightly lower than its major peers.
price movement probabilities
Possibilities of feeling risky: “Risk” assets such as stocks, commodities and commodity-linked currencies have benefited from a risk-friendly trading environment, likely due to better-than-expected earnings reports and expectations of the end of tightening cycles from major central banks.
Unless today’s US CPI reports and tomorrow’s FOMC decision indicate that central bank interest rates will rise much more for the foreseeable future than markets have warranted, global assets may continue to reflect optimism about the end of rate hikes.
euro scenarios
Base case: As several ECB officials have hinted at, the central bank is likely to raise interest rates by 25 basis points to 4.00%.
ECB members may also stress the need to do more to fight high inflation, perhaps with new task force forecasts or explicitly telling us there is room for further rate hikes.
However, weaker-than-expected economic indicators make it difficult for the ECB to justify further tightening and euro traders know this.
As in last month’s decision, the EUR could rally on an effective interest rate hike ahead of profit-taking and “pessimistic” pricing pulling the common currency lower against its major peers, especially those who remain hawkish/surprised by rate hikes such as the Canadian dollar.
The reaction to the ECB event is also likely to be short-lived as markets finally shift their focus to US topics and data releases.
Alternative scenario: To underscore the need for further tightening, the ECB may raise interest rates by 50 basis points instead of 25 basis points, which is a very low scenario at the moment.
A higher than expected interest rate hike could support the euro across the board. However, the strength of the euro will depend on how optimistic the new economic outlook is and pressure from Lagarde.
