ECB meeting preview: Will the ECB slow hikes despite double digit inflation?

ECB meeting: the basics

The forthcoming European Central Bank (ECB) meeting will take place on Thursday 15 December 2022. The initial monetary policy decision will be announced at 1.15pm BST, with the press conference getting underway at 1.45pm.
Coming in a 24-hour period that will have seen both the Federal Reserve and Bank of England monetary policy decisions, the ability to surprise markets could be lessened as a result.

Will the ECB slow their tightening despite double digit inflation?

Inflation remains the key issue facing by the ECB, with the November reading of 10% signalling the second consecutive double-digit CPI figure. The declines seen in US inflation does bring hope that we have seen prices top out for the time being. However, we are yet to see any particularly significant reversal in eurozone CPI which remains well above the 7.1% figure seen in the US this month. While European inflation remains highly elevated in comparison to the US, we can see that the dollar has been turning lower in accordance with that June top in US CPI.

The FOMC meeting provided a clue as to the direction of travel for central banks as they approach so-called ‘terminal rates.’ The rate rise underway across Western central banks will only last so long, with the focus now shifting to gain greater clarity over where interest rates end up and how long that lasts. With the Federal Reserve raising rates by another 50-basis points, we are now looking at an environment where rates end up flat-lining at 5% over the course of 2023. The ECB is some way behind one that front, with the deposit rate expected to rise from 1.5% to 2% and the repo rate predicted to rise from 2% to 2.5%. However, while markets are pricing in a 71% change of a 50-basis point hike, there is also a 29% chance attached to a third consecutive 75-vasis point move. Traders will be closely following any hints on where rates will end up, with markets widely expecting another 150bp of upside including today’s decision.

While the ECB may ease their pace of tightening, traders should also keep an eye out for any signs that they plan to bring forward their quantitative tightening timeline. The bank look likely to phase out their reinvestment of the asset purchase programme portfolio in 2023, with any hints on how that might take shape worth following.

EURUSD heading lower after FOMC meeting

EUR/USD has been on the back foot following the FOMC decision, with markets fearing a drawn-out recession and prolongued period of elevated rates. Nonetheless, we do still remain within an uptrend as evident on the four-hour chart. A break below trendline and 1.0443 support would swing things back into a bearish direction. However, the ongoing uptrend does highlight the potential for another push higher.

DAX reversing towards key support

The DAX has similarly been turning lower after a prolongued period of gains. The impending recession does raise risks of weakness across equity markets given how extended the recent rebound has become. Nonetheless, we would need to see price break below the 14124 support level to bring a bearish signal into play. Until then, the uptrend remains in play for the DAX.