Will the ECB Keep a Lid on Inflation Expectations?

ECB leaves rates on hold, but the statement warning of inflation challenges as growth forecasts are cut and inflation forecasts lifted. The initial statement pretty much confirmed what Lagarde had signaled ahead of the meeting – Net asset purchases are set to end on July 1, rates are expected to be hiked by 25 bp in July and the central bank expects a further rate hike in September. That doesn’t totally rule out a 50 bp move in July, but signals that at the moment at least that is not the central scenario, although the statement already flagged that a larger step may be needed in September. So rather than front loading the tightening cycle, the ECB is keeping the bigger step for later, with the statement also flagging the likely need for additional gradual increases further out. The new staff projections see inflation at 6.8% this year, 3.5% in 2023 and 2.1% in 2024 – clear upward revisions and with the 2024 forecast a tad above the ECB’s target. Core inflation is expected to be even higher – at 2.3% in 2024. Growth forecasts, meanwhile, were revised down to 2.8% this year, and 2.1% in 2023 and 2024.

The Dollar Index is holding in the 102.40 range, though down from the overnight peak of 102.667 after the ECB’s steady stance but guidance for rate hikes. The ECB’s indication it will begin hiking rates next month to start a tightening cycle has boosted EUR and the EURUSD has risen to 1.0744 from the earlier low of 1.0689. A lot of the relative strength of the EUR will depend on the expectations for the size of the September ECB hike. Action is basically on hold momentarily, awaiting President Lagarde’s press conference. GBP is also rallying and has risen to 1.2549 from 1.2492. On the other hand, a gain in USDJPY to 133.95 from 133.187 is supporting the Dollar Index.

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Stuart Cowell

Head Market Analyst

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With over 25 years experience working for a host of globally recognized organizations in the City of London, Stuart Cowell is a passionate advocate of keeping things simple, doing what is probable and understanding how the news, charts and sentiment work together to provide trading opportunities across all asset classes and all time frames.

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