Market Insight – ECB Preview

The main focus during this week for euro traders is likely to be the European Central Bank rate decision. Most analysts agree that the central bank will hike rates by 25-basis points.

However, for EURUSD traders’ policy divergence is one of the central themes to watch as some believe that the Fed could pause hiking and the ECB will not. However, if the ECB does hint at pausing after the June meeting, we could see the EURUSD well bid.

According to ANZ Bank, the ECB is expected to raise rates by 25 basis points in both June and July, reaching a terminal deposit rate of 3.75%.

This aligns with market expectations and signifies that the ECB’s easing cycle will commence later and be shorter than the Federal Reserve’s. ANZ suggests that this scenario will provide support to the Euro.

Also, the bank also points out that the Euro has largely priced in the economic slowdown in Europe. It believes that any additional decline in the Euro would more likely be due to movements in the US dollar.

As it stands, ANZ is maintaining its year-end target for EURUSD at 1.14, indicating a belief in the Euro’s resilience in the face of economic headwinds. This reflects the bank’s assessment of the ECB’s policy path and how it contrasts with the Federal Reserve’s approach.

Deutsche Bank has its own focus and is expecting a 25-basis point hike and a hawkish message. The focus will be on what the ECB signals for the path ahead.

The investment bank says that “Risks are further hikes beyond July might be needed.” They also note that they expect another +25-basis point hike in July to take the terminal rate to 3.75% but see the risk of moving towards 4.00-4.25% in the autumn.