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Christine Lagarde’s hawkish tone is not enough to bolster the euro

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What's new?

Despite the ECB's hawkish tone yesterday during the ECB press conference and the premise of a historic rate hike coming for the EUR, it loses ground against the dollar. Traders are more concerned about the consequence of a slowdown in economic activity and the war in Ukraine. The EUR declined by 0.9% yesterday.

The euro is down more than 6% versus the dollar this year, it was down almost 7% in 2021. From a monetary policy standpoint, the fed already hiked rate by 75 bps whereas ECB plan to hike by 25 bps in July. At least the hawkish tone should translate into a hedge against an additional drop in the euro. We don’t think the EUR will depreciate to parity.

Below are major banks' predictions regarding the path of rate hikes in the coming months:

Deutsche Bank: A 25 basis-point increase in July followed by 50 basis-point hikes in September and October and 25 again in December. A terminal rate of 2% to be reached in June 2023 via 25 basis-point hikes

Goldman Sachs: Liftoff with 25 basis points followed by 50 in September and October before another 25 basis-point move in December. Three more increases of that amount in 2023 to a terminal rate of 1.75%

JPMorgan: A 25 basis-point hike in July and then 50 in September, with additional quarter-point increases in October and December and the risk of more aggression

The ECB is committed to fighting market fragmentation

Markets should have no doubt that the ECB will combat an unjustified widening of borrowing costs in the euro area known as fragmentation, Bank of France Governor Francois Villeroy said. Villeroy speaks on BFM Business television Friday after the ECB on Thursday set out plans to raise interest rates and end net asset purchases of government bonds: “ We have always known how to combat this fragmentation during the past years every time with different instruments, “Nobody should have any doubt, including on markets, over our collective will to prevent fragmentation”, “We have the will and nobody should doubt we will have the instruments if and when necessary”

What’s in the pipe?

  • US CPI, University of Michigan consumer sentiment Friday

FX rates

USD/JPY @ 133.78 - Bullish trend

EUR/USD @ 1.0613 - Bearish trend

GBP/USD @ 1.2477 - Bearish trend

AUD/USD @ 0.7128 - Bearish trend

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