Going into the ECB rate meeting on Thursday has markets expecting the ECB to remain on hold with rates. The latest Reuters poll shows 39 out of 69 economists expecting the ECB to keep rates unchanged at 3.75%, whereas 30 expect a hike to 25 basis, points hike. However, 36 of those 69 surveyed expected a deposit rate to be at 3.75% by the year-end with the other 33, saying the rate would be at 4% by year-end. So one thing is clear: most economists surveyed expect the ECB to be at or very close to being at terminal rates.

This also ties in with the latest ECB speakers’ comments. On Wednesday last week, ECB’s Kazmir said there’s one more likely last interest rate hike still needed. He personally preferred a 25 basis point rate hike. ECB’s Knot, on the same day last week, said markets may underestimate a September hike, and that September’s decision would be a close call. ECB’s Nagel says the central bank has still not reached its target on inflation hinting that further rate hikes may still be appropriate.

Short-term interest rates, however, are expecting the ECB to remain on hold. There is a greater than 50% chance of a hold on Thursday’s ECB meeting. Current expectations see a 59% chance of a rate hold.

The current curve expects the ECB to cut rates around the summer of 2024.

So, according to short-term interest rate markets, the ECB will keep rates at 3.75%. So what’s the best tradable outcome. In this situation, the best outcome is likely to come from a central bank decision that shows a more hawkish ECB. The reason for this is over the last couple of weeks ECB pricing for a hike has slowly been falling due to a deterioration in European economic data. However, if the ECB is seen to be prioritising the inflation battle over growth concerns, then watch out for potential EURGBP gains out of the meeting.

Major trade risk

The major risk here is if the ECB stresses growth concerns over and above inflation worries and indicates coming rate cuts. This would likely weaken the EUR and send EURGBP lower. So, there are, as always, two-way risks with this outlook.