On Thursday, as expected the European Central Bank (ECB) kept rates unchanged, confirmed it would end the purchase program (APP) in July and said it intends to raise interest rates in July by 25bps. Analysts at Wells Fargo point out that market participants and the ECB are unlikely to contemplate multiple 50bps rate hikes and see the ECB moving more gradually than the Federal Reserve, indeed expecting a softer EUR/USD.
“We acknowledge a larger move in September is not yet a done deal, and with ultimately depend on the inflation and activity data in the interim, but we are leaning in the direction of a larger increase at that September meeting. By December however, we see a greater chance that headline inflation will begin to recede even if energy prices simply stabilize, and that high energy prices will begin to weigh more noticeably on economic activity.”
“We expect the ECB to increase its Deposit Rate by 25 bps in July, 50 bps in September, and by 25 bps at each of the meetings in December 2022, March 2023 and June 2023, which would lift the Deposit Rate to +0.50% by the end of 2022, and +1.00% by mid-2023.”
“We believe it is unlikely the European Central Bank, or market participants, will contemplate multiple 50 bps rate hikes, and the ECB is still projected to raise interest rates much more gradually than the Federal Reserve over the medium-term. Thus, we do not expect today's announcement to be very supportive of the euro over time, and indeed still see a weaker euro versus the U.S. dollar over the medium-term.”
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