In the space of just a few days, the interest rate pricing for central banks across the world has rapidly fallen due to the SVB crisis. The fears of contagion, the action from the US to backstop depositors, and the sharp moves in bond markets have led to expectations sharply changing. In short, the market senses that something has broken and anticipates lower rates ahead now. For context, STIR markets had the Fed with a terminal rate of 5.68% just one week ago. They now have the terminal rate at 4.95%. See the Financial Source interest rate tracker for the Fed here:

So, heading into today’s ECB meeting the market was expecting a 50bps rate hike. However, since the SVB and Credit Suisse crisis, the hawks will have a harder time convincing others of their views according to a Bloomberg Sources piece on Monday this week. Deutsche Bank said on Tuesday that it now expects a 25bps is more likely than the 50bps that was previously. However, according to a Reuters sources piece, on Wednesday morning the ECB is still leaning towards a 50 bps rate hike given the recent calmness of markets, stubborn inflation, and credibility concerns. Remember that the ECB had signaled a 50bps rate hike well in advance. Although, these comments were made prior to the emergence of the Credit Suisse crisis that emerged after the bank’s biggest backer, Saudi National Bank, said it could not provide any more cash.

So, what does this mean?

It means that the ECB will still most likely raise rates by 50bps. The fallout on Eurozone banks from the SVB crisis is very limited and a contained crisis is now the base case. However, the Credit Suisse crisis could still flare up. The key will be to look at the forward guidance. Does the ECB now see lower rates ahead? Has its outlook changed at all? The key divergence to watch for now will be one between the ECB and the Fed. If the Fed is heading towards a peak terminal rate, but the ECB is still pressing on with a series of rate hikes then watch the EURUSD pair for some more potential upside provided that the Credit Suisse fears subside are contained. If USD weakness persists on dovish Fed expectations then watch the EURUSD for more gains. Key daily support marked on the chart below:

However, note that there are multiple drivers in the markets right now and the wisest decision would probably be best to watch today’s decision from the sidelines.