Markets are pricing in a 75-bps rate hike from the European Central Bank on Thursday. Charts suggest that the Euro could trade higher in the coming days, but the ECB will need to provide the spark.
In recent weeks, European Central Bank policymakers have changed their tone since the middle of the summer. While the July ECB meeting minutes revealed that there was a split over the 50-bps rate hike, intensifying Eurozone inflation pressures thanks to surging energy prices have a 75-bps rate hike now favored as the most likely outcome this week.
The ECB might be dealing with the most difficult set of circumstances among the major central banks, as a significant recession appears increasingly likely over the coming months; stagflation is coming to the Eurozone , which is bad news for the Euro. Thankfully for the Euro, other currencies are dealing with equal or worse problems, masking weakness in several of the major EUR-crosses.
With a 75-bps rate hike effectively discounted by markets, all eyes will be on ECB President Christine Lagarde’s press conference to see what kind of path policymakers lay out to show determination in the face of a rapidly eroding economic situation. ECB President Lagarde needs to channel her inner Mario Draghi and find her “whatever it takes” moment if the Euro is going to sustain a meaningful rebound.rates set a fresh yearly low yesterday before turning higher today.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.
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