Short-term interest rate markets and economists are both expecting the ECB to hike rates by 25bps on Thursday at 13:15 UK time. Christine Lagarde clearly signaled a July rate hike and expectations are firmly set for that to go ahead. However, what is not clear is what the ECB will signal about in September.

Forward guidance to move the EUR

Going into the meeting there has been some conflicting signals. On July 18, ECB’s Knott said that a July hike was a ‘necessity’, but hikes beyond July are not a certainty. Knott is usually hawkish, so that was quite a gentle statement from Knott on the path of rates. Also, note that the flurry of weak PMI prints this week could be a cause for concern for the ECB. It will not want to crush the economy to deal with inflation, so that may factor into a more moderate pace ahead. See the European data below:

ECB’s Nagel called inflation a ‘greedy beast’ and it would be a mistake to cut interest rates too soon (Jul 19) and ECB’s Simkus wouldn’t be surprised if the ECB continues to hike in September. In contrast, ECB’s Stournaras said that another 25 bps hike ‘would be enough’.

Short-term interest rate markets point to a September hike

The pricing in interest rate markets sees another 25 bps hike coming in September, so that is the expectation.

EURGBP focus

With the GBP looking vulnerable to weakness as peak pricing gets priced out after the last UK inflation data print, keep an eye on the EURGBP. If the ECB clearly signals more rate hikes are needed this year, then EURGBP could see some gains out of the ECB meeting. However, if the ECB signals it has finished hiking then the EURGBP pair would be vulnerable to intraday selling.