Today’s ECB meeting could become one for the history books. The originally expected interest rate hike of 50 basis points to 3.50% may be questioned after the market turbulence of the last few days. At the very least, there are likely to be some protagonists “out there” who would like to see a smaller interest rate move, or even better, none at all.
But it must also be said that it would be a crazy signal from Ms Lagarde to do nothing today. Even a step of only 25 basis points has to be translated in the sense that the banking market obviously has a problem. Finally, inflation still shows no signs of calming down and provides no plausible reason for 25 basis points or less. On the contrary, the ECB would be still behind the curve, significantly even compared to the Fed. It would therefore be rational for the ECB to deliver the expected 50 basis points today. After that, however, it is likely that Ms Lagarde will hold a press conference that is as defensive as possible. Although this is contrary to her monetary policy goals, the ECB does not act independently and will probably have to bow to the pressure.
In the overall picture, of course, the central banks' self-created dilemma becomes apparent here. On the one hand, their huge balance sheets are naturally subject to price corrections when interest rates rise. On the other hand, the market has been so pampered with liquidity that even small changes in book values lead to panic. For perspective, here is a long-term chart of the SP500. The low in the 2008/09 banking crisis was 666 points. Where is the crisis?
The EURUSD currency pair is trading below its 50 ema (1.0651) at time of this writing. This is bearish territory but recent volatility has already quickly changed the short-term picture several times. If the 50 basis points really come today, the Euro should run (strongly) upwards in the first reaction. During the press conference, this movement could then be (somewhat) reversed. An interest rate move of 25 basis points or less, on the other hand, should further accelerate the sell off of the Euro.
In the medium and long term, as I have written many times before, I still believe that the euro will return to the lows of 2022 or even lower. Regardless of this, there are important technical levels. Above 1.0800, the 1.10/1.12 resistance zone is again within reach.
Good luck,
Sebbo