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Market Insights

The ECB preview June 2023: Getting closer to the end of the rate hiking cycle


The ECB Preview

Getting closer to the end of the rate hiking cycle

Upcoming Event - Thursday, June 15, 2023 - 12:15 pm UTC European Central Bank (ECB) interest rate decision

Current Interest Rate June Forecast
3.75% 4.00%

Source: Tradingview/ECB June 13 2023 11:48 UTC

Macro commentary:

  1. Highly likely the European Central Bank (ECB) will increase rates by 0.25%.
  2. Highly likely there will be another hike again in July, provided that there is not a major fall in EU core inflation from now until then.
  3. Somewhat likely that the ECB will hike again in September, but even if they do hike come September, that could be the last hike, at least for a while.

The ECB has made it very clear that they will hike 0.25%, if they don’t hike it will be a major surprise and damage the credibility of the ECB.

What may not be a major surprise, is if they hike 0.5% instead of 0.25%!

Given the above, euro markets have had a lot of time to price in a 0.25% hike, so a 0.5% surprise could see a surge in demand for euros, thus a stronger euro vs its peers.

Why a stronger EUR/JPY during the last 90 days?

Japan's rate remains negative at -0.1%. The Bank of Japan (BOJ) has made it very clear that they do not want to be seen as stepping away from “ultra-loose” monetary policy.

The European Central Bank (ECB) has been increasing its rates since last year from 0.5% to 3.75% (current), and the rate is expected to be at least 4% by June 15, 2023.

Chart 1 EUR/JPY as of June 13 2023 12:21 UTC

The EUR has enjoyed 5.33% of gains against the Japanese YEN during the last 90 days while falling 2.53% against the GBP during the same period.

EUR FX Crosses Last 3 month percentage change
Euro/Japanese Yen 150.584 5.33%
Euro/South African Rand 20.10996 2.95%
Euro/Norwegian Krone 11.62919 2.67%
Euro/Swedish Krona 11.64122 2.36%
Euro/New Zealand Dollar 1.7568 1.82%
Euro/U.S.Dollar 1.07934 0.58%
Euro/Swiss Franc 0.97816 -0.05%
Euro/Australian Dollar 1.59276 -1.04%
Euro/Canadian Dollar 1.44135 -2.19%
Euro/British Pound 0.85853 -2.53%

Data as of June 13 2023 12:08 UTC

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Euro area Core Inflation showing signs of cooling?

Chart 1 EU Core Inflation Tradingview June 12 2023 12:26 UTC

Euro area unemployment has been decreasing

The ECB’s next moves depend on the inflation outlook

While EU headline inflation is showing signs of slowing, there remains the risk that a strong EU labour market could imply that the risk of inflation “popping” higher again can not be ruled out.

Chart 2 Tradingview June 13 2023 12:29 UTC

European stock indices have been enjoying solid gains year to date

In general, European Stock markets are having a very strong 2023 EU Stocks 50 Index is up over 12% since the start of 2023

Chart Tradingview June 13 2023 12:38 UTC

Can the EUSTX 50 CFD prevailing uptrend hold?

Technical commentary: EUSTX50 current price 4,334: The index is in an uptrend since the October 2022 lows, higher tops and higher bottoms on price indicate a colic US30 pattern uptrend.

Provided price can remain above the very short term (5-13 days) key support spotted near the 4,220s, the prospect for a further advance higher towards a potential upside extension near the 4,815 level can not be ruled out.

Spain 35 Index has gained +11.19% so far this year

Chart Tradingview June 13 2023 12:33 UTC

German 40 Index is up +15% year to date

Chart Tradingview June 13 2023 14:08 UTC

Bottom line: EU stock indices seem to have momentum on the prospects that inflation will cool still further, but later this year the strong EU jobs market may add to the risk of high inflation returning.

So, has the European economy turned a corner and are investors feeling more positive? The price direction of the European stock indices could very well be signaling this in this case.

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