ECB Preview: Three scenarios and their implications for EUR/USD – TDS

Economists at TD Securities discuss the European Central Bank (ECB) interest rate decision and their implications for the EUR/USD pair.

Hawkish (35%)

“The GC decides to get one last 50 bps hike in. While data is generally moving in the right direction, strong services inflation and general concern about sustained labour market pressure on prices remain top of mind. Guidance remains largely as in March, with the ECB not committing to further hikes, and remaining fully data dependent. There is no update on H2 APP reduction. EUR/USD +1.0%.”

Base Case (45%)

“The ECB hikes 25 bps because inflation is still too high, labour markets strong, and the region avoided a severe recession this past winter. The passing of peak banking system stress allows the GC to re-introduce forward guidance, with an intention to hike again in June. The pace of the H2 reduction in the APP is deferred until June (though there are risks the ECB foreshadows an acceleration). EUR/USD +0.15%.”

Dovish (20%)

“The GC decides to hike 25 bps, but due to the ongoing risk backdrop, refrains from any material changes to forward guidance, leaving data in the driving seat going forward. This means that more hikes are entirely possible, but that the GC isn't comfortable signalling the precise amount at this point. No changes to APP/TLTROs at this point. EUR/USD -0.75%.”