ECB is expected to raise interest rates at 1:15 pm BST
Close call
The European Central Bank's decision on interest rates is a close call. Inflation remains high, but on the other hand, the European economy is leaning toward a recession. Nevertheless, the market expects the ECB to decide to raise interest rates by 25 basis points at 1:15 PM BST and this will likely be the last hike in the cycle. The deposit rate currently stands at 3.75% and the rate is expected to peak at 4%. The press conference is scheduled at 01:45 BST.
What do we should to know before the ECB decision?
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Eurozone CPI inflation remained at 5.3% y/y in August, with an expected decrease to 5.1% y/y. The higher-than-expected inflation print was due to a smaller year-on-year decline in energy prices than in previous months
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Monthly price growth was 0.6% m/m in August
- Core CPI inflation fell to 5.3% y/y from 5.5% y/y
- Germany's manufacturing PMI rebounded slightly in August to 39.1 points but continues to show clear signs of recession
- PMI for the eurozone rebounded to 43.7 points. Eurozone services PMIs also remain clearly outside the expansion zone
- The ECB will also release new macroeconomic projections. Rumors indicate that the projections are expected to show CPI inflation staying above 3% in 2024, which was expected to convince policymakers to vote on a hike
- The ECB statement in July indicated that "another hike in September will be needed if there is not enough evidence that the monetary tightening to date has been sufficient to bring core inflation down to target within the forecast horizon."
- Since July, we have not seen data that would indicate a larger decline in inflation that ensures reaching the inflation target in the forecast horizon. The economy has cooled noticeably which could indicate chances for faster inflation declines in the future. On the other hand, there were also concerns among some ECB bankers that the tightening was excessive
- If the ECB does not hike interest rates, a "hawkish pause" scenario is possible, as was the case with the Fed's decision in June. In that case, the next date for a hike would likely be December.
Inflation in the Eurozone remains high and is starting to rebound for key economies. Given the ECB's statement in July regarding needed evidence of a further decline in inflation to target within the forecast horizon, we should expect an interest rate hike. Source: Bloomberg Finance LP, XTB
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Eurozone manufacturing PMIs point to recession, a factor the ECB is certainly taking into account. Source: Bloomberg Finance LP, XTB
The market is pricing around 60% probability of a hike today. Source: Bloomberg Finance LP
How will the market react?
The DE30 is once again testing the vicinity of the 15600 point level. Just before the ECB decision, it managed to defend this crucial support, but the hawkish tone of the decision (declaration of possible further hikes) could lead to an attempt to break through this support. In that case, the DE30 could head towards the next important level of 15425, which is above the lower limit of the expanding wedge. On the other hand, if the ECB announces the end of the hiking cycle, a quick rebound toward key resistance near the 16000 level is possible. We can notice that the resistance is strengthened by 50 and 100 SMA. We can also notice that there is a closer resistance at 78.6 Fibo retracement, a little below 15800.
Source: xStation5
