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Market Insights

The ECB preview July 2023: 4.25% next leg up for the Euro area interest rate?


Remember, last year the ECB interest rate was just 0.5%. The chart illustrates ECB interest rate adjustments during the previous 12 months.

The pace and speed in interest rate hikes have been fast, to say the least!


Euro area underlying economic data suggest healthy and “normal” conditions… for now

  • Traders should expect to see a 0.25% rate hike from the ECB since the July increase has already been signaled to the markets during last month's ECB policy meeting.
  • The July ECB rate decision will be the last policy meeting until September since no ECB policy meetings are scheduled for August.
  • Traders, investors, and analysts are likely to focus ahead and on what clues ECB President Christina Lagarde may drop about the direction of rates from September onwards.

The underlying data that could influence ECB decisions to hike, hold, or cut rates:

Harmonized index of consumer prices (HICP)

Since the ECB aims to maintain price stability, the HICP Index is one index traders may want to pay attention to.

  • This index measures inflation across Euro area countries. It indicates the changes in inflation over time of prices paid by consumers for consumer goods and services.

The ECB has a goal for inflation to move closer to its 2% target. As you can see from the chart, the ECB still has work to do in order to get the price stability they desire.

Progress on Headline inflation

Headline Euro area inflation rate fell to 5.5% during June after hitting 10.6% in October

The chart illustrates the progress the ECB has made with regard to getting the headline inflation number down to 5.5% from the October 10.6% inflation peak.

Euro area notable data points

ECB underlying data points suggest a “normal” Euro economic area

  • Euro area core inflation has fallen -1.79% during the last 3 months
  • Euro area unemployment is falling, current EU unemployment rate is relatively low at 6.5%
  • Euro area workers are seeing an increase in their wages, with wage growth of +1.72% during the previous 3 months
  • Interest rate normalization, ECB interest rates have gone from negative to positive since the ECB began its higher interest rate cycle

Bottom line: It's unlikely that the ECB will step back from its current interest rate hiking cycle, although a pause in hiking can not be ruled out, the still elevated HICP (higher consumer prices) should support the ECB if they decide to keep on hiking even past September.

So, unless the HICP falls sharply, traders and investors should expect the ECB rate to remain above and even beyond 4.25% for the foreseeable future.

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ECB Indicators 3 3 month % change
Core inflation -1.79%
Unemployment rate -1.52%
Euro area wage growth +1.72%
Consumer confidence +44%
Interest rate 4%
EUR / USD 1.87%

Source: Tradingview as of July 25 2023 11:15 UTC

Price action and trend insights

The major EU stock indices have seen strong performance during the last 52 weeks.

Index Last Year to date % 52 week %
Italy (MIB) €2,892 21% 36%
Germany 40 (DAX) €16,190.95 16.28% 22.16%
Spain 35 (Ibex) €9,543.50 15.97% 18.53%
EUSTX50 (EU50) €4,383.03 15.54% 21.87%
French 40 (CAC) €7,427.31 14.73% 19.47%

Source: Tradingview as of 25/7/2023 12:27 UTC

Technical commentary:

EUR/USD: despite falling -2% from its recent 30 day highs, price remains within a 7 month uptrend (see chart). The current downside pressure appears to be a corrective move of the May low-July high upward advance. Further downside correction towards the 1.1.0880s can not be ruled out, while upside prospects above 1.1275 (52 week high) could place the round number at 1.14 in sight.

EU Stocks 50 Index bullish conditions remain

Current price seems to be in a consolidating period eg. trading range. However, current price has been holding firm and near its recent highs, this observation could be a bullish indication that buyers have been willing to offer price support above the 10 week moving average. Upside prospects towards the €4,540 level can not be ruled out, while downside is seen below the €4,310 support (see chart).

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This week's ECB interest rate decision could signal to traders and investors that, taking some key indicators into consideration, the Euro area economy looks healthy enough to handle the prospects of higher ECB interest rates.

Take care when trading important market events, history teaches the trader to always expect the unexpected!

Happy trading.

Not investment advice. Past performance does not guarantee or predict future performance.