Harkster Preview - ECB Decision Tree

Today’s focus.. Worryingly, consensus see all outcomes leading to EURUSD lower..

Consensus: The Reuters “sources" story has moved the probability of a hike to 100% by year end.  

• The ECB forecasts are now expected to see 2024 inflation > 3% relative to the street that had a lower forecast range around 2.7% prior to the article. 

• Hawks need to convince the doves to do more as economic activity slides in key industrial regions, lending growth is slowing, PMI leading indicators show Businesses fearing a downturn and the rise in gas/oil prices is a tax on future growth for the region. As a result, this higher 2024 inflation forecast could be the tipping point to bring one more hike to the table, even though Germany is slipping towards recession.  

• However even if Lagarde & Co hike, its crucial she indicates we're at or near restrictive, a willingness to do more if needed but to maintain a data dependent approach. A +25bps hike brings us to the highest level of rates since the Euro was launched in 1999. The market is priced for one more but wants to hear that the risks of more tightening are small, the ECB will become data dependent and that Lagarde sees no more in the immediate horizon. Today is all about her message, hike but done, or no hike but potentially keep the door open for their next meeting (hawkish pause).  

• Her communication should mirror Bundesbank’s Schnabel's recent comments … “Under this data-dependent approach, we cannot predict where the peak rate is going to be, or for how long rates will have to be held at restrictive levels. We can also not commit to future actions, meaning we cannot trade off a need for a further tightening of monetary policy today against a promise to hold rates at a certain level for longer.” 

• @HarksterHQ will be watching the Italian-German yield spread, any blow out on re-finance fears for Italy after a hawkish meeting can ultimately weigh on the single currency. The market will not want a "hard landing" scenario to appear from an overly aggressive Lagarde with a sole focus on fighting inflation and limited fear of the economic slowdown on the horizon. PMI’s indicate a very sluggish growth outlook for the second half of 2023. We will be watching for ECB growth downgrade from current 0.9% despite the expected uptick in inflation. A worsening #stagflationary outlook is a clear risk from the staff forecasts and would also be negative for the EUR.

• Discussions on further changes to the ECB’s bond holdings will most likely be left for a future meeting.  

• One key note, everything @HarksterHQ has read this week has indicated EURUSD will end the day lower.. the surprise and most painful move will be a close > 1.0800 .. 

ECB Decision Tree: 

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ECB Previews that have arrived in our curated ECB channel on Harkster.com: 

• Reuters Sources ECB's crucial 2024 projection to put inflation above 3%, source says 

• Reuters: Stop or go? Five questions for the ECB 

• FT: ECB grapples with knife-edge decision on interest rates...  

• Raiffeisen: ECB Watch: Will I do it again, or is the hiking cycle finally ending? 

• ING: ECB meeting preview: A final hike 

• Nordea: ECB Watch - Hawkish hold? 

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