European Central Bank (ECB) meetings have typically been pretty dull affairs over the past year or so. Gone are the days of Mario Draghi telling listeners that he’d do ‘whatever it takes’ and the EUR whipsawing around in the aftermath. However, the next meeting on Thursday could provide us with some interesting action to note.
Could we get a rate lift off date?
The main thing that could spark a rally in EUR would be if Lagarde and team comment that they are ready for lift off with interest rates. It’s likely that the asset purchasing programme will be finishing imminently. This insinuates that the next step to normalize monetary policy would be to raise interest rates for the Eurozone.
As a recap, deposit rates have been negative in the Eurozone for several years now. This has provided a drag on the EUR, along with bonds. However, with inflation rising there is renewed pressure for the ECB to start raising rates to stem this move.
We don’t think that rates will flip to being positive until the end of the year, but if the ECB signal their intent to do so, this could spark a rally in EUR assets.
How much and how quickly?
There is some chatter that the ECB could raise interest rates by 0.5% in July. If this is confirmed, it would be the most bullish scenario we can see from Thursday’s meeting. We think there is a chance of this, but that the ECB will most likely use vaguer language when it comes to how much and how quickly they could hike rates.
This is because they need to take into account the negative hit this would give to the equity markets. As much as it’s a positive surprise for the EURO, it would be negative for the stock market.
Keeping an eye on other concerns
Finally, we’ll be watching out for chat around the high energy prices, the impact of the war in Ukraine and inflation expectations. Any headlines from these points could also cause some fireworks on Thursday afternoon.
In terms of trade ideas, we do think the battered EUR could have some kick in it. We would like to be long EUR pairs, and prefer to be long EURGBP given our bearish GBP view right now. Shorting the equity market seems like a high risk/reward play that we don’t think quite stacks up.