EURUSD
ECB to announce rates at 1:15 pm GMT, markets split between +25 and +50 bp
The European Central Bank is scheduled to announce the rate decision today at 1:15 pm GMT with ECB President Lagarde holding a post-meeting press conference at 1:45 pm GMT. Economists surveyed by Bloomberg and Reuters point to a 50 basis point rate hike but those surveys may be outdated already and do not reflect real expectations, following latest turmoil in the banking sector. Let’s take a look at today’s decision!
What’s priced in?
Economists expected the European Central Bank to hike rates by 50 basis points today, putting the deposit rate at 3.00% - the highest level since late-2008. Such an outcome is expected by 55 out of 56 economists in a Bloomberg poll. Deutsche Bank is the only one predicting a 25 basis point move. However, it should be said that Deutsche Bank changed its forecast to 25 basis points as recently as yesterday amid a turmoil in the European banking sector. As money markets are much quicker to react to developments in financial markets than economists, a look at market pricing for today’s meeting may offer a better picture. Markets currently price in around 40% chance of a 50 basis point rate hike and around 60% chance of a 25 basis point rate move.
Money markets are 60-40 split between a 25 and 50 basis point rate hike at today’s meeting.
How things changed after SVB-CS turmoil
Disconnect between economists’ expectations and money market pricing is quite massive and it is easy to pinpoint the reason behind it - turmoil in the US and European banking sectors. While market participants were not too concerned about the ECB abandoning the plan to hike by 50 basis points, things changed this week as contagion fears spread to Europe with Credit Suisse shares freefalling yesterday. This has led to a massive drop in rate hike expectations with a chance of 50 basis points rate hike dropping from almost-100% to around-40%!
Markets were almost fully pricing in a 50 basis point rate hike at today’s meeting as recently as a week ago!
ECB faces dilemma amid Credit Suisse turmoil
Turmoil in the European banking sector is causing a dilemma for the ECB - should it press on with significant rate hikes in an attempt to get inflation control even if it risks triggering a European banking crisis? This is a tricky choice to make.
On one hand, Credit Suisse managed to get assurances from the Swiss National Bank and Swiss regulator that it will receive support should the situation require. Credit Suisse announced that it intends to exercise an option to borrow an additional 50 billion CHF from Swiss National Bank via a covered-loan facility in order to improve its liquidity position. This led to relief on the market and an over-30% jump in Credit Suisse shares so far today.
On the other hand, support from SNB does not mean that woes for Credit Suisse are over. It is not a secret that Credit Suisse has been involved in some of recent high-profile market scandals, like Archegos or Greensill scandals. It looks like there may be some significant compliance and risk management flaws in the Swiss bank and it is having a negative impact on investors’ confidence in the bank. While support from authorities helped ease concerns for now, another worrying piece of news on Credit Suisse may see troubles and market turmoil reignite.
Cautious message from Lagarde looks likely
Having said that, a cautious decision today if made, like hiking by just 25 basis points or even holding rates unchanged, should not come as a surprise. It will likely trigger dovish reaction on the markets (EUR down and equities up) given that expectations are split between +25 and +50 bp move. However, the accompanying statement is likely to be very cautious. ECB President Lagarde will face questions on banks’ condition during the press conference but it looks highly likely that she will play down current risks, applaud actions by Swiss authorities and hint that ECB needs to better understand the situation and reasons behind it before making any response. She is also likely to be prudent when making statements on future policy moves and refrain from making clear comments on the size of rate hikes as she did last month when she strongly hinted that a 50 basis point rate increase is coming at the March meeting.
It should also be noted that it will be a quarterly ECB meeting and it means that a new set of economic projections will be released. Those are likely to point to lower headline inflation in the months ahead while core price growth is expected to be little change compared to previous forecasts.
A look at the markets: EURUSD and DE30
EURUSD slumped yesterday as banking sector woes spread across the Atlantic. The pair tested a short-term upward trendline but bulls managed to defend it. A point to note is that this trendline can be seen as the neckline of the head and shoulders pattern with the shoulderline being in 1.0740. A dovish ECB could see that pair erase today’s daily gains and slump below the trendline. This would pave the way for a deeper drop.
Markets were almost fully pricing in a 50 basis point rate hike at today’s meeting as recently as a week ago!
ECB faces dilemma amid Credit Suisse turmoil
Turmoil in the European banking sector is causing a dilemma for the ECB - should it press on with significant rate hikes in an attempt to get inflation control even if it risks triggering a European banking crisis? This is a tricky choice to make.
On one hand, Credit Suisse managed to get assurances from the Swiss National Bank and Swiss regulator that it will receive support should the situation require. Credit Suisse announced that it intends to exercise an option to borrow an additional 50 billion CHF from Swiss National Bank via a covered-loan facility in order to improve its liquidity position. This led to relief on the market and an over-30% jump in Credit Suisse shares so far today.
On the other hand, support from SNB does not mean that woes for Credit Suisse are over. It is not a secret that Credit Suisse has been involved in some of recent high-profile market scandals, like Archegos or Greensill scandals. It looks like there may be some significant compliance and risk management flaws in the Swiss bank and it is having a negative impact on investors’ confidence in the bank. While support from authorities helped ease concerns for now, another worrying piece of news on Credit Suisse may see troubles and market turmoil reignite.
Cautious message from Lagarde looks likely
Having said that, a cautious decision today if made, like hiking by just 25 basis points or even holding rates unchanged, should not come as a surprise. It will likely trigger dovish reaction on the markets (EUR down and equities up) given that expectations are split between +25 and +50 bp move. However, the accompanying statement is likely to be very cautious. ECB President Lagarde will face questions on banks’ condition during the press conference but it looks highly likely that she will play down current risks, applaud actions by Swiss authorities and hint that ECB needs to better understand the situation and reasons behind it before making any response. She is also likely to be prudent when making statements on future policy moves and refrain from making clear comments on the size of rate hikes as she did last month when she strongly hinted that a 50 basis point rate increase is coming at the March meeting.
It should also be noted that it will be a quarterly ECB meeting and it means that a new set of economic projections will be released. Those are likely to point to lower headline inflation in the months ahead while core price growth is expected to be little change compared to previous forecasts.
A look at the markets: EURUSD and DE30
EURUSD slumped yesterday as banking sector woes spread across the Atlantic. The pair tested a short-term upward trendline but bulls managed to defend it. A point to note is that this trendline can be seen as the neckline of the head and shoulders pattern with the shoulderline being in 1.0740. A dovish ECB could see that pair erase today’s daily gains and slump below the trendline. This would pave the way for a deeper drop.
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