Hawkish ECB unlikely to help the euro at the meeting – Danske Bank

The European Central Bank ECB will have its monetary policy meeting next week. Analysts at Danske Bank point out the meeting is set to be the formal end of the net asset purchases and a clear signal to hike interest rates in July. They don’t see the ECB helping the euro and still look for EUR/USD to fall to 1.00 over the next twelve months.

Key Quotes:

“Next week’s ECB meeting is set to be the formal end of ECB net asset purchases and a clear signal to hike rates in July, although without a specific guidance of the size of the first rate hike. We expect ECB net purchases to end on the 1 July, thereby in line with previous guidance for Q3.”

“Market focus will be on the discussion if a 50bp hike is possible, and if so when, as well as to any hints about tools that ECB may take to address fragmentation. We expect ECB to hike 25bp each meeting until Mar23, but risks are clearly skewed for a 50bp rate hike in H2 this year (July or Sep most likely).”

“The ECB’s stance has been well communicated ahead of the meeting, including the release of Lagarde’s blog post. As such, the market is well ahead of the view that rate hikes are likely at most, if not all, meetings going in to H2 and excess liquidity will fall. At present, we view it hard for ECB to surprise on the hawkish side versus those market expectations. If any, we might see some pushback against recession risks and/or confidence in inflation turning around ‘sooner than later.’ Both may well give a bit of downside to EUR/USD spot at the meeting, maybe in the scope of some 50-100pips given EUR/USD has seen a short-term uptick to 1.07 recently.”

“We continue to forecast EUR/USD towards 1.00 over the coming 12M.”

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