When will ECB raise rates❓

The European Central Bank is set to announce a monetary policy decision tomorrow at 12:45 pm BST. Market does not expect rates to increase this week but calls for a rate hike continue to mount, with many pointing to July as a start for rate lift-off. Nevertheless, the upcoming meeting will be closely watched as the Bank is expected to provide guidance and may set the stage for rate hikes in the following month.

No rate hike… at least not yet

Central banks around the world are hiking rates at a neck-breaking pace in an attempt to rein in inflation. While price growth was elevated following massive pandemic stimulus, the situation only got worse this year with the Russia-Ukraine war and Chinese lockdowns magnifying supply chain issues. Nevertheless, the ECB is not expected to deliver a rate hike tomorrow. Money markets price in only a 19% chance of a hike. However, a meeting tomorrow will include a release of a new set of economic forecasts, that may set clear expectations that rate lift-off is coming in July.

Expected QE exit

An unofficial rule of thumb is that major central banks wait until quarterly policy meetings for major policy announcements to support them with fresh economic forecasts. In theory, a rate hike could be delivered as it will be a quarterly meeting. Also, we cannot forget that ECB's QE programme is still on and hiking rates while still injecting liquidity into markets would be questionable to say the least. However, a need to tighten policy is urgent therefore a base case scenario for this week's meeting is that ECB will announce QE end and strongly hint at rate hikes coming in the next months.

Lagarde's presser in focus

End of QE announcement is largely priced in already and the new set of economic forecasts is likely to have only a brief impact on market volatility. Market's attention will therefore be almost entirely focused on the press conference of ECB President Lagarde (1:30 pm BST). Money markets currently price in a 25 basis point rate hike in July, followed by a 50 basis point rate hike in September. This would be a massive tightening for a central bank that kept rates negative for years. 

Such hawkish expectations for such a dovish central bank are fuelled by recent comments from ECB members. However, central bank chiefs are often trying to manage expectations in order not to entice volatility in the markets and this is exactly what we expect from Lagarde tomorrow. While the ECB President is unlikely to trash tightening expectations entirely, she is also unlikely to provide a clear guidance on the scale of incoming rate hikes. As such, there is a scope for some dovish surprise as ECB does not have a very good track record of delivering onto hawkish expectations.

A look at EURUSD and DE30

EURUSD launched a recovery move in mid-May in an attempt to snap an over-year long downward move. However, recovery stalled at the resistance zone ranging below 23.6% retracement of the whole downward impulse. As we have said already, expectations for ECB are very hawkish so risks for EUR are skewed to the downside going into the meeting. However, a strong hint that rate lift-off is not only coming but that it also will be a quick one could help common currency regain ground.

EURUSD at D1 interval. Source: xStation5

Situation looks much more interesting on the DE30 chart. German equity index has made a few failed attempts of breaking above the 14,600 pts area and a potential head and shoulders pattern surfaced on the chart. Index is currently testing a neckline in the 14,470 pts area and a break below could pave the way for an around 250 points drop. A strong hint at tightening could in theory serve as a trigger for such breakout.

DE30 at H1 interval. Source: xStation5