ECB: Taking cues from the flexible Fed

Anticipations of a 25 basis points rate increase prevailed ahead of the latest ECB meeting. The market was predominantly concerned with the forward guidance and the prospective path of the rates. In brief, despite an uptick in inflation expectations and a reduction in GDP projections, the ECB aims to adhere to a supple and information-oriented methodology in its future endeavors.

Flexibility in ECBs strategy

Christine Lagarde signaled that a rate hike in July was “likely”. However, the ECB is closely monitoring key economic indicators to inform its decisions. Specifically, core inflation and the tight labor market are of interest. Core inflation projections were revised significantly higher, with 5.1% for 2023 (up from 4.6%) and 3.0% for 2024 (up from 2.5%). The latest eurozone core inflation reading was 5.3% y/y following the ECB meeting. ECBs Wunsch mentioned the possibility of a hike in September if core inflation remains around 5%, so that provides a benchmark for his thinking.

German and US bond yield spread

Following the more data-dependent approaches of both the Fed and the ECB in their respective meetings last week, the bond yield spread experienced a rapid increase. Why？ Bond traders perceive the Fed reaching its rate peak before the ECB. Therefore, to gauge the direction of EURUSD, it is advisable to monitor the bond yield spread, available on trade view by adding DE10Y-US10Y to the instrument panel

EURUSD yield and expectations

As per the interest tracker of Financial Source, the short-term interest rate markets are predicting a solitary ECB rate hike, ultimately reaching 3.79%. There is still uncertainty regarding another hike in September if one is already completed in July. To determine the answer, it is advisable to closely monitor the inflow of labor and inflation data.