The ECB is still "hawkish", the fight against "prices" continues

Yesterday, the president of Lagarde made her statements the likelihood of another interest rate hike increased in the euro area at the next meeting in July. Although the market had previously assumed that such a scenario might be possible, it was clearly confirmed yesterday. EUR / USD exchange rate dynamically rose towards 1.0950 and was the highest since May 11.

Tightening necessary

The ECB raises the cost of money once again to the level of 4 percent. (refinance rate). There was such a move widely expected. It was surprising to the market that Lagarde left open the question of what would happen in July. The tone of the words was strongly suggesting that further tightening is necessary. The market was quietly hoping that some disinflationary signals could cause the ECB to tone down a bit. However, this did not happen, resulting in a noticeable strength of the euro. It was emphasized that the institution has not yet finished its fight against "expensiveness" and there is still much to do.

At the moment, the market is fully pricing in the July hike and the September one gives about 65 percent. chance. It was also a hawkish signal upward revision of inflation measures. The base rate is to be 2023% in 5,1. (previously 4,6%) and in 2024 3%. (previously 2,5%). Headline inflation forecasts were also raised to 5,4%. in 2023 and to 3,0 percent. in 2024. Here, however, the revision was cosmetic. Simultaneously EBC expects a slightly worse (than previously) economic growth this year, which is to amount to 0,9 percent. and 1,5 percent in the next.

Signs of falling inflation

The ECB in its statement acknowledges for the first time that they are emerging first signs of decline in core inflation. Indeed, core inflation fell recently for the first time in a long time. This trend should be more visible at the mid-September meeting. By then, headline inflation should fall to around 4%. The many doves in the Governing Council will then likely argue that the price momentum is moving in the right direction and that the bank should wait and see what the previous rate hikes do.

EUR/USD rose surprisingly fast during and after the conference. Today morning rates are slightly corrected but the chart still shows a level above 1,09. Yesterday's session brought the strongest one-day increases since the beginning of the year.

Source: Łukasz Zembik, OANDA TMS Brokers