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Market Insights

ECB Policy Insight; Europeans are about to get a big pay raise?

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The ECB raises interest rates when wages start increasing… traders can’t rule out a 0.25% rate hike at the next Monetary Policy Meeting on June 9th!

What should we expect on Thursday June 9th?

Let’s see the facts first…

  • Energy prices have surged higher and there is not much that the ECB or any other central bank can do since higher energy prices are due to many outside forces beyond the reach of a central bank's influence.
  • The Euro has been depreciating against the USD and other G10 FX.
  • Euro Area Inflation has been increasing sharply.
  • Euro Area wage growth has been increasing.
  • Many on the Board of the ECB’s Governing Council are prepping for Euro benchmark rates to move from negative to positive in the months ahead.

Is the Eurozone ready for higher interest rates?

  • European traders should be prepared for an interest rate decision during the June 9th ECB governing council meeting.
  • Since the April ECB meeting failed to deliver any interest rate adjustment chances are that the ECB will make an historic shift from years of zero to negative rates to a path towards multiple rate hikes during 2022 and beyond.
  • Inflation has constantly accelerated across the Eurozone and now political pressures may start to force the ECB to do something to help slow down rising inflation.

Wages could be the data to watch!

Wages may be the piece of data that will push the ECB to make the case for raising interest rates!

  • With regard to wages, so far the salaries across the Eurozone have not been moving higher in the same manner as wages have been increasing in the United States - both economies are experiencing higher inflation, but the US FED has had the jump start on hiking rates.
  • The rising wage data in the United States is the main fact which can explain why the United States has been leading the Eurozone when it comes to moving fast with rate hikes!

Hold on a second! Euro Area Labour costs are about to skyrocket? If this is the case, then European traders and investors should get in front of the data …

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The end of an error is very near!

The multi-year long ultra-low / negative interest rates across Europe is about to end and, guess what? Higher wages and higher inflation has been the result - in fact the ECB can now say “Mission accomplished” as the low rate policy has had its desired effect.

The ECB will have to announce an end to its multi-year policy of buying assets worth billions on a monthly basis.

  • This announcement will most likely happen at this week's monetary policy meeting.
  • The end of the ECB’s asset purchasing program will open up the prospects for interest rates during July and September 2022, at two 0.25% clips.
  • Traders and investors should not rule out the potential for a surprise 0.5% rate hike sometime near the end of 2022.

July 21st 2022:

  • Expect a 0.25% ECB hike in July to follow
  • Rate should move from -0.5% to -0.25%

September 22nd 2022:

  • Expect another 0.25% rate hike in September.
  • Rate should move from -0.25% to 0%.

October 27th 2022:

  • Possible 0.5% rate hike?
  • EU Rate at 0.5%?


What’s next?

Stronger Euro... higher European stock markets…and the possible slowdown of EU real estate sales.

Take your pick and take your trade. European investors may be entering a new “goldilocks” period of economic growth.

EUR/USD Commentary:

EUR/USD trying to stabilize above its 10-week simple moving average (bullish). Rate of Change 13 period oscillator is above its trigger line (bullish). Potential buy signal could be triggered if the 4 period Rate of Change oscillator can cross above its zero line which may open up the prospects for the EUR/USD to make a move to test the 200-day moving average near the 1.12260’s?

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What is the ECB meeting?

Governing Council of the European Central Bank (ECB) monetary policy meeting.

Why is it important?

  • Monetary policy is an economic policy that manages the size and growth rate of the money supply in an economy.
  • It is a powerful tool to regulate macroeconomic variables such as inflation.
  • Inflation is an economic concept that refers to increases in the price level of goods over a set period of time.

Central banks use a few tools to adjust the direction of growth for an economy including:

  • Increasing or decreasing interest rates
  • Direct purchasing of government financial assets
  • Increasing or decreasing the amount of cash in circulation

Why do traders, investors and businesses care about Monetary Policy?

Monetary policies have a direct effect on inflation so central banks may increase or decrease the cost of borrowing e.g. interest rates so that low inflation can support a strong economy and to push back on high inflation which may slow an economy. However, if an economy is running too hot and inflation is low, a central bank may increase interest rates to cool the economy. So, any businessperson or investor should be aware of monetary policy and the direction central banks are moving towards.

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

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