ECB Expected to Hike, But What Then?

The ECB faces a communication challenge at its next meeting, where it's set to raise rates while the shared economy teeters on a recession.

The Next Data Is Crucial

Almost every analyst agrees that the ECB will hike by a quarter of a point at the next meeting. What comes after is the question, with even hawks like Germany's recently saying that a rate hike in September would be "data dependent". This hesitancy is due on July 31, when Eurostat will publish the first look at Q2 GDP figures.

Europe managed to avoid a recession, with Q1 GDP growth coming in flat in the final measure. But there is considerable worry that the figure will come in negative after manufacturing PMI logged its worst result since the pandemic. The preliminary reading of composite PMI also slipped into contraction for July. On the same day, inflation data is set to be released, and the recent inflation data has been below expectations. All of this could add to the ECB wanting to leave the door open to some kind of pause in September but not come across as dovish and risk a rebound in prices.

The Euro Reaction

The Euro has been moving higher recently as the ECB was seen as determined to keep raising rates while the Fed was levelling off. But some wonder if there is enough room for the ECB to keep raising, with the economy sputtering. The relative yields between US and Germany show lower rates later next year, as investors appear to be pricing in a larger economic downturn in Europe than in the US.

Recently, the ECB's rhetoric has shifted towards a more balanced view. After the last meeting, there was a strong emphasis on "too high for too long", often repeated by ECB President Christine Lagarde. In recent weeks, the rhetoric has been more around keeping rates restrictive for an extended period. Money markets are already moving to price in the possibility of a pause in September, which could solidify and weaken the Euro further if the ECB doesn't deliver a strong message about more rate hikes later this year.

EUR/USD in Correction After Throwover?

EUR/USD has been down since the 18th, with the structure looking impulsive and exposing $1.10 in the short term. If the peak turns out to be a throwover of a wedge pattern, further declines could be seen, opening up $1.0632 and $1.0516. $1.0834 would be interim support. But if the current support or the round $1.10 hold firm, the pair could soar past $$1.1279 and off to fresh highs towards and beyond $1.13.

Source: SpreadX / EURUSD

Key Takeaways

The ECB is set to raise rates at its next meeting, but uncertainty remains about future hikes due to concerns over Europe's economic downturn. The upcoming Q2 GDP figures and inflation data release will be crucial in determining the ECB's future decision. The Euro has been strengthening, but investors are pricing in a larger European economic downturn than the US. The ECB's rhetoric has shifted towards a possible pause in rate hikes in September. Money markets are adjusting, which could weaken the Euro if the ECB doesn't provide a strong message about future hikes.