EUR Finds Some Support Ahead of the ECB: What to Expect from the European Central Bank Meeting

EUR: Some support before the ECB

It’s ECB week in the eurozone, and there is a growing sentiment that this will be a very tight decision. The governing council is clearly facing growing division as some signs of lingering inflation are met by evidence of an economic slowdown, which recently strengthened the dovish front. Our economics team thinks that while it’s a close call, the European Central Bank should deliver one last 25bp hike (here's our full preview). Market pricing is 10bp ahead of the meeting and 18bp of total tightening by January. Still, we think the chances of the ECB skipping this meeting and hiking later on are relatively slim given the rapidly worsening outlook.

EUR/USD has been given some life by the PBoC and BoJ, with USD softening and EUR/USD finding support into the 1.0700/1.0750 area. The pair can remain supported for today given the lack of major data releases, but we have seen evidence of the unwinding of speculative EUR positions into the ECB meeting. Given the upside risks for the dollar ahead of the US CPI release, we suspect another drop below 1.0700 before the ECB announcement on Thursday is all but possible.