ECB Preview: Another 25bps on the table

The European Central Bank (ECB) will be meeting on Thursday for its policy announcement and it’s expected the interest rates will be raised by another quarter points (25bps) which will take its main refinancing rate to 4.25% as the central bank aims to combat red-hot inflation around the zone. As it stands, the ECB will likely be giving it another push in September with another rate hike despite the economy already showing weakness as the recent PMI indicated a slow-down in business activity.

Inflation around the Eurozone still remains well above the ECB’s target of 2% with headline inflation dropping to 5.5% from 6.1% due to a fall in energy prices. However, the core inflation rate still showed persistence in price pressures with its latest reading at 5.50% from the previous of 5.30% which could be the basis for another rate hike but the ECB has to also pay attention to the impact of tightening on the economy. The latest PMIs from the Eurozone are indicating the economy might be heading into a recession if the ECB continues with its tightening campaign.

Where next?

This leaves investors with the big question “When will it end?”. From the last meeting, policy members were in support of a July rate hike but have been less bullish about another increment in September. A follow-up conference will hold 30 minutes after the ECB has announced its rates on Thursday with ECB President Christine Lagarde, expected to give a clue on its next policy agenda and also reassess its forecast on economic growth but it’s expected the central bank will maintain its hawkish position as regards inflation.

EURUSD Technical Analysis

One key market to watch will be the EURUSD as the ECB conference will be coming a day after the Fed has decided on its interest rates. In what might look like a counter-move to dampen the impact of a hawkish Fed that is likely to hike rates by 25bps, a similar tone from the ECB will lend a bit of support to the Euro which has been losing grounds against the US dollar since its price broke above the 1.1000 price level convincingly. With its price very much indicating strong bullish momentum within a rising channel, a break below the 1.1000 psychological level could see EURUSD slide further back to the support area of the channel. Alternatively, a hold above could see the bulls resume their push further with the possibility of exiting the channel.