Traders Brace for First ECB Rate Hike in Over A Decade

The main event for markets today will be the July ECB meeting. The bank is scheduled to announce its first rate-hike in 11 years and expectations are divided over whether the bank will opt for a 25bps hike, as signalled, or go for a larger 50bps hike. We’ve seen a trend recently of central banks opting for larger-than-expected hikes in a bid to curtail soaring inflation. Given the ECB is late to the party, a larger hike would certainly have more impact, and would likely drive EUR higher. However, the bank must also manage the negative impacts on the economy though EUR might trade lower in response. Traders will also be monitoring the bank’s forward guidance, to gauge how the bank will act over the remainder of the year. 

Key Factors for Today

• USD remains weaker as attention switches to ECB today 

• Risk sentiment buoyant, though euro assets lower ahead of ECB

• EUR leading in FX – upside risks into ECB today

• JPY weaker as BOJ reaffirm easing stance 

• Gold and silver continue lower

• Crude slips following EIA report 

Coming Up 

• EUR ECB Meeting 
• USD Philly fed manufacturing
• USD unemployment claims 

Risk Assets Firmer Again Today

With the US Dollar still sitting off highs and under pressure again today, risk assets have been broadly supported. DAX is trading a little lower today as traders brace for the first ECB rate-hike in over a decade. US stocks are still moving nicely higher, benefiting from a softer Dollar. Nikkei continues higher today also following a dovish BOJ meeting overnight. Aside from the ECB meeting today there is little on the data sheet to impact flows, suggesting that equities look likely to remain supported heading into the weekend. 

Expectations Split Ahead of ECB 

In FX, EUR is trading higher again today as traders await the ECB. Given the hawkish expectations in the market, it might be a case of “buy the rumour, sell the news” unless the ECB come through with a firmly hawkish outcome. A larger rate hike and solid forward guidance would likely be needed to send EUR higher post-meeting. 

JPY Weaker Following Dovish BOJ Meeting 

JPY has been the weakest performer over late Asian and early European trading on Thursday. Overnight, the BOJ once again bucked the trend of central bank tightening, reaffirming its commitment to keeping easing in place. The BOJ noted the high level of uncertainty and downside risk within the economy as the reason for keeping policy unchanged. 

Gold & Silver Break Lower

Gold and silver prices are breaking lower again on Thursday. Following muted action over the start of the week, both metals are tanking today ahead of the ECB meeting as traders brace for the potential for a larger 50bps hike from the bank. Higher equities prices is also weighing on metals, with both gold and silver unable to capitalise on a softer USD this week. 

Oil Slips Following EIA

Oil prices are softening again today. Following on from a yesterday’s selling, we’ve seen crude futures coming back under pressure on the yesterday’s EIA report. The group reported a -0.4 drawdown which, on the back of the prior week’s large surplus, wasn’t enough to drive prices higher.