The ECB is eyeing a zero rate hike this year and a higher interest rate for 2022. Its goal is to keep the fastest inflation rate in the eurozone at 2%. Markets are pricing in two quarter-point hikes next year, though traders have erased those bets, citing concerns about war in the region.
The recent global financial crisis has affected many economic indicators, causing the euro to slump against other currencies. While it is difficult to predict where the currency will go, a few indicators are promising for the currency. Inflation expectations have been on the rise for a couple of years, and the currency has lost its value against the euro. This means that the ECB is more likely to raise interest rates than many analysts had previously anticipated.
On the other hand, if the Fed Funds rate is raised, the US Dollar could continue to outperform its European counterpart. A break below parity could also trigger a turn lower. Alternatively, a shift in ECB policy will lead EUR/USD to test its yearly low of 1.0349. Despite the recent rally in the EUR/USD, the euro may take a turn lower after the ECB’s rate decision. On the other hand, if the ECB shows more willingness to shift gears in 2022, the EUR/USD could continue to retrace. In addition to potential upside retracement, moves into Fibonacci resistance are likely to be short opportunities.
The ECB’s decision to raise interest rates has hurt the credibility of forward guidance, writes Jim Reid, an analyst at Deutsche Bank. The decision to raise rates now will reduce expectations of inflation and help curb inflation expectations. The decision has already prompted higher government bond yields. If the ECB decides to lift interest rates in July, inflation will continue to rise.
Meanwhile, Italy’s government bond yield has jumped in the opposite direction from its prices. This was prompted by a resignation of Prime Minister Mario Draghi and a measure the ECB is taking to help precarious economies. Other European bond yields, meanwhile, are steady as investors wait for the ECB rate decision. As the ECB’s policymakers prepare to make a decision on interest rates, European stocks are mixed. Russian natural gas supplies to Germany have boosted their price. However, the news of a resignation of Italian prime minister Mario Draghi has weighed on investors’ mood.
The ECB rate decision on Wednesday was widely anticipated but unexpectedly delayed. The central bank raised rates due to an updated assessment of inflation risks and because they have approved a new policy tool that will help prevent differences in eurozone borrowing costs, which would hinder the ECB’s monetary policy. As the ECB’s summer forecasts are due, they could indicate that the eurozone’s monetary union will continue to grow, but at a slower rate than previously anticipated. Furthermore, it could also show that Russia’s gas supply is not stopped.
ECB officials will announce interest rates on Thursday, and the decision could be significant. After the announcement, Christine Lagarde will hold a press conference, highlighting the need for monetary policy to be more restrictive as different countries have different debt levels and economic outlooks. This will result in tighter monetary policy and prevent government borrowing costs from diverging dramatically across the eurozone.
