ECB PREVIEW: FOUR SCENARIOS AND THEIR IMPLICATIONS FOR EUR/USD – TDS

Economists at TD Securities discuss the European Central Bank (ECB) interest rate decision and their implications for the EUR/USD pair.

Hawkish 50 bps hike (5%)

“The text is similar to February, but removes the guidance for the next meeting, and simply says that the Governing Council ‘intends to raise rates further’, with data dependency the key driver of future hikes. When asked, Lagarde clearly says that rates have further to rise, and that 25 or 50 is on the table for May (ie, the ECB is not ready to pause). Beyond May, there's no clear signal other than data dependency. EUR/USD -1% to -2%.”

Base Case: 50 bps hike (40%) Rules out further 50 bps hikes

“The Governing Council hikes 50 bps, but concretely signals a shift to 0 or 25 bps hikes going forward given uncertainties about the banking sector and spillovers from tighter financial conditions. Lagarde acknowledges that in such an uncertain environment, and as terminal approaches, it is prudent to move in smaller steps, i.e. the ECB rules out 50 bps hikes from here. EUR/USD -0.5%.”

25 bps Hike (35%)

“The ECB opts to hike rates by just 25 bps, with no forward guidance. LTRO-like operations are possible. Lagarde says that the pace of hikes must now become slower as terminal is approached, and effectively rules out further 50 bps hikes. She says that rates may still rise though, but the Governing Council will determine that at subsequent meetings. EUR/USD 0%.”

Rates on Hold (20%)

“The ECB keeps rates on hold to buy time given the volatile backdrop. Lagarde stresses that the ECB has not yet reached terminal, but that ongoing volatility in the global banking sector means the GC wants to take time to see the impact on the real economy, implying that financial markets are doing some of the ECB's work right now. EUR/USD 1.5%.”