ECB Preview

With stocks under pressure and inflation still rising, investors are looking to see what the ECB will do after the summer.

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It's not time, yet

There has been a lot of speculation about when the ECB will raise rates, with members making comments to the media ahead of the blackout period. A blog post before the WEF penned by Lagarde was seen as setting the house a bit in order, suggesting that the liftoff was imminent and that 50 basis points would come during the summer. But, with several members talking about "summer" as a time frame, what that exactly means has provided some uncertainty about what the rate trajectory will look like.

The ECB pledged not to raise rates before ending its bond purchase program in June. For this reason, all bets are on a July hike, with the June meeting officially ending QE and communicating to the market that rates will be rising. So, a lot of focus will be on the statement and Lagarde’s post-rate-decision presser where she might give some more clues as to what the ECB will do.

How steep?

The specific question is whether the ECB will do a "double" rate hike, or will do 25bps in July and another 25bps in August. How the market reacts could come down to how the phrasing is interpreted, particularly around reaching zero rates. Is the ECB looking to "quickly" get back into positive rates, or a "gradual" return; the former could be seen as more hawkish, while the latter more dovish.

For the stock market, the end of the QE program could mean the DAX won't have as much support. Although German large-caps typically are disproportionately more eligible to benefit from ECB buying, most of the debt has already been bought up. Bond yields have already been climbing as investors expect a more aggressive trajectory in line with the BOE and Fed. 

DAX gradually higher but will it last?

The German DAX has seen restrictive price action lately. The real resistance lies at 15000, where a multilevel zone appears to have built a wall separating the bull from the bear market; the 200-day average can be observed flattening at the territory

If bulls continue to gradually pull prices higher breaking above the mean regression trendline of the 12500/13500 – 15000 base channel, 15000 will likely offer some pullback if not a full-blown reversal. But if the ECB goes it aggressively, 14000 will be back on the table. This is where the 38.20% Fibonacci of the 12500-15000 leg lies along with the 50-day average. Below there, the golden ratio will play a critical role since it’s where the second ascending leg begins. 

In contrast, breaking past 15000 will open the path to the 38.20% and 61.80% inverse Fibonaccis at 15900 and 16500. But in the very short term, it is likely the major zone ‘attracts’ prices higher.

Key takeaways

The ECB is likely to raise rates in July, but some uncertainty remains about when as the end of QE is not officially announced yet. How the market reacts could depend on how quickly the ECB wants to get rates back into positive territory. So, a lot of attention will be put on Lagarde’s presser.