ING’s Francesco Pesole expects the ECB to leave interest rates unchanged but keep them hawkish, with tensions in the Middle East and rising gas prices in Europe keeping hawks in check. He says policymakers are aiming to keep market prices at around 45 basis points from tightening monetary policy until the end of the year, likely as a result of the well-known post-meeting media leak, which should support initial euro rates, even if ING’s near-term bias on EUR/USD remains tilted towards 1.1380.

Hawks maintaining the ECB may limit the decline of the euro

“The ECB is widely expected to leave interest rates unchanged today, but a surprise increase cannot be completely ruled out.”

“Our base case is a hawkish stance. Renewed escalation in the Middle East and rising gas prices in Europe faster than oil prices should, in our view, result in hawkish voices dominating the Governing Council.”

“Today the goal could be – once again – to maintain market prices (45 bps until the end of the year) to limit the risk of unanchoring of inflation expectations.”

“Achieving this may require some indication that a September increase remains on the cards – via a high-profile leak to the media after the meeting rather than directly at the press conference.”

“A central bank meeting would normally be a major catalyst for the EUR/USD currency pair to break out of its narrow trading range, but we do not expect that to happen today. Our short-term bias remains tilted to the downside as we believe FX markets are dangerously complacent with developments in the Gulf. Unless information flows become more constructive, we expect EUR/USD to decline towards 1.1380 in the coming days.”

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