ECB In Focus

All eyes are on the Euro today as traders brace for the latest ECB rate decision. The bank is widely expected to raise rates a further .25% today, in line with the recent rise in inflation and hawkish signalling from the bank itself. However, for EUR bulls, the big question is whether the ECB can today live up to traders’ hawkish expectations and deliver forward guidance which matches the market’s own expectations. If it does, this should help EUR rally near-term, particularly if tomorrow’s US inflation data undershoots forecasts. However, if the bank fails to convince bulls that further tightening is on the way, this could lead to a sharp, downward reaction in EURUSD given the hawkish build up in expectations we’ve seen recently.

Hawkish Expectations

The market is currently pricing in 50bps worth of tightening by year end, a hike today and one further hike this year, and a further 35bps worth of tightening by July 2027. These forecasts might prove too aggressive give that the general consensus so far is that we’re yet to see the second-round inflation effects which many feared would materialise on the back of the energy price shock earlier in the year. If the ECB sounds more neutral on the prospect of further tightening, this could see EUR unwound into tomorrow’s US CPI print. However, given the current resurgence in oil prices amidst a fresh escalation in the US/Iran war, bulls might yet remain hopeful if the ECB simply acknowledges the fresh upside risks the situation presents, particularly with oil back up at $100 p/b.

Technical Views

EURUSD

For now, the pair remains atop the 1.16 level and while this area holds as support, focus is on a fresh push higher with 1.1756 the next target for bulls. To the downside, 1.1490 is the next support to note if we see a downward reaction into the weekend.