Sintra Symposium Signals: ECB's Hawkish Stance Faces Challenges and Euro's Rally at Risk

EUR: Sintra's effect may not last too long

President Christine Lagarde and other European Central Bank officials continued to signal more tightening ahead at the Sintra symposium yesterday. Markets received some more detailed inputs from other Governing Council members aside from Lagarde herself. For example, Belgian central bank chief Pierre Wunsch said the next three inflation readings will need to “give a clear signal that core is indeed going down” to convince the ECB to pause. Latvian hawk Martins Kazaks said earlier that the slowdown in the eurozone economy is not enough to bring inflation down and also explicitly pushed back against rate cut expectations before mid-2024.

 

A newswire report this morning suggested that some hawkish members are considering a faster reduction of the Bank’s bond portfolio, shifting to a phase of active bond sales of assets. The euro’s reaction to the news was limited: we’ll see whether this has any impact on peripheral spreads when European markets open.  

 

On the dovish front, Fabio Panetta is set to move from the ECB Executive Board to the Governing Council as he replaces Ignazio Visco as Bank of Italy governor. Panetta has stood out as an even more dovish voice than Visco (Italian members have generally swung on the dovish side), although that hardly changes the balance at all within the GC at this particular point in time.

 

Today, we’ll see Italy release June CPI numbers, ahead of other member countries’ and eurozone-wide figures tomorrow. Lagarde is set to deliver another speech in Sintra, and markets will keep an eye on more side-line comments by other officials. The euro has been on the strong foot, but a sustainable rally above 1.10 may be premature considering markets are already fully pricing in two hikes by the ECB and the risks of an upside correction in the dollar are non-negligible.