What we can expect from European Central Bank Meeting
Scarring affects from a pandemic, energy crisis, Italian politics, and unprecedented inflationary pressures, ECB has a very difficult job.
We are definitely expecting a rate hike on Thursday, which will be the first since 2011. What will be the size of that hike, no one knows. What the market is expecting is a move of 25bps. Unfortunately, ECB is in a straitjacket with their own inflexible forward guidance for a 25bps hike at the meeting. Flexibility is more important than a constantly evolving macro backdrop. Breaking this will create credibility issues and unnecessary volatility. The market is pricing in 90bps of hikes over July and September meeting, meaning 25bps in July and 50bps hike for September are well priced.
The ECB meeting coincides with the key 21 July end of Nord Stream pipeline maintenance. The biggest risk for euro is whether gas flows come back or not. It’s very simple, no gas flows-Euro and gas flows plus Euro. Italian political scene is also becoming increasingly messy. Mario Draghi will face a confidence vote tomorrow. He wins and stays , He loses and new coalition is formed or he loses and snap election takes place. The most bearish option for Euro could be the the 3rd option.
One week implied volatility for EURUSD is significantly elevated as it captures all the euro risk factor inputs. Liquidity has deteriorated and this has the potential to cause disorderly, non-linear price moves if big orders hit the market. On the downside, parity is obviously a key support zone to monitor on further sell-offs. The RSI has made a strong move out of oversold, but needs to get back above 50 for bulls to have more confidence in the move. There was a minor divergence too on the recent parity low.