ECB Meeting In Focus Tomorrow

The June European Central Bank meeting tomorrow is drawing a huge amount of focus amidst increasingly hawkish expectations. The turnaround in ECB sentiment has been one of the most interesting developments within markets over recent months. The invasion of Ukraine in February, along with rampant inflation and ongoing Brexit and COVID related difficulties, had all but squashed any initial ECB hawkishness at the start of the year. With the ECB striking a concerned and highly dovish tone over the end of Q1, EUR came under heavy selling pressure as the monetary policy divergence between the ECB and other G10 central banks widened.

Shift in ECB Narrative

However, over recent months there has been a sudden shift in the ECB’s narrative. With the rise in inflation confounding central bankers (including the ECB’s) initial “transitory” classifications, the ECB was forced to shift its tone. Meeting minutes and comments from ECB members began to highlight a shift over April which was then confirmed across May with ECB head Lagarde finally warning that the bank would look to hike rates by .25% as early as July, following the winding down of the bank’s asset purchase program in June.

Market Split Over Rate Hike Size

However, expectations have become even more hawkish in recent weeks with some ECB members noting the need for a larger than .25% hike. With other central banks, such as the Fed, BOC, RBA and RBNZ each moving in .5% increments now, the market is caught between two opposing views; firstly, that the ECB will look to lift by just .25% because this is the first hike in over a decade. Secondly, that the ECB needs to hike by .5% because it is moving so late compared with other central banks and with how far inflation has run.

Focus on Forward Guidance

With that in mind, the big focus for traders going into tomorrow’s meeting will be on the tone of the guidance offered. The bank has previously signalled that it would end asset purchases before hiking rates and so a rate hike at tomorrow’s meeting seems highly unlikely. However, the bank might choose to lay the groundwork for a larger hike in July, which would no doubt see EUR firmly higher in response. If such a signal is given, European equities indices will come under pressure amidst an uptick in EUR. However, if the ECB chooses to push back against this view and signals that the first hike will be at a lower increment, EUR would likely reverse lower near-term.

Technical Views

EURUSD

Following the recent correction higher which brought EURUSD back up into the centre of the bear channel, price has subsequently stalled. The market is now sitting in a block of consolidation between the 1.0653 and 1.0775 levels. Momentum studies have lost conviction recently though remain bullish for now, suggesting a break higher is still viable. Should we break higher here, 1.0885 and the channel top are the next resistance areas to note.