Markets will be keenly watching ECB President Christine Lagarde’s press conference on Thursday, for the latest signals pertaining to the size of its intended July rate hike, in addition to the widely expected announcement about the end of the central bank’s net asset purchases.
Noting that the RBA and the RBI have now also hopped on the 50-basis point hike bandwagon, it remains to be seen whether such peer pressure could ratchet up the hawkish inclinations within the ECB’s Governing Council. After all, the impetus for a larger-than-usual hike is already there, with Eurozone inflation hitting a fresh record high of 8.1% in May.
EURUSD could resurface above 1.08 should Lagarde’s remarks be seen to acquiesce with her more hawkish colleagues. This also assumes that the ECB lays the groundwork this week for exiting its negative interest rates regime in one fell swoop come July. The deposit rate currently sits at negative one half of a percentage point. An ECB hike this week would be a major shock and instead propel EURUSD way beyond the clutches of its 50-day moving average and towards the 1.09 mark.
However, should Lagarde stay relatively dovish and insist on a run-of-the-mill 25bp hike next month, then EURUSD is expected to continue languishing in the downtrend that has persisted over the past 12 months. There are now 75bps of rate hikes priced in by money markets by September.
Risk sentiment to be influenced by US inflation print
Global markets are also keenly awaiting Friday’s US CPI release for signs that price pressures have peaked. If the 8.2% median estimate for May’s inflation year-on-year growth proves true, that would mark two consecutive months of moderating headline figures since the 8.5% print in March.
Markets’ propensity for risk-taking could be rejuvenated if the latest inflation data emboldens the thought that consumer price growth has already hit its summit, potentially taking the edge off the Fed’s ultra-hawkish stance.
On the other hand, if this Friday’s CPI data exceeds market expectations, underscoring the unrelenting nature of inflationary pressures, that should force the Fed into an even more aggressive stance. Such an outlook should restore the benchmark dollar index DXY back to recent heights while keeping 10-year Treasury yields above the psychologically important 3% mark, to the chagrin of other assets such as growth stocks, gold, and EM assets.
