The latest inflation data from the ECB shows good news regarding consumer inflation. Consumer expectations for inflation over the next 12 months have fallen for the first time since May 2022 according to the latest monthly survey from the ECB. Expectations for the next 12 months have fallen to 5% from 5.4% in October and expectations for three-year inflation also fell from 3% to 2.9%. This is good news and provides some relief for the ECB.

The ECB’s last meeting

In December’s meeting, the ECB hiked by 50bps as expected, but stated that it would need to raise rates ‘significantly’ to tame inflation. The ECB also announced that it would start Quantitative Tightening in March this year by €15 billion per month until the end of Q2 this year. On balance, this was a hawkish message with an early start to QT.

The hawkish messaging

On January 11, ECB’s Rehn stated that the ECB needs several more significant rate hikes. ECB’s De Cos also said that the ECB sees ‘significant’ rate hikes at coming meetings. In terms of short-term interest rate markets, it is expected the ECB to reach a terminal rate of 3.37% this year, but end the year with cuts down to 3.06% by December. So, that’s one rate cut this year once the terminal rate has been reached. Check out the Financial Source implied interest rate curve below.

The EUR and the next ECB meeting

The expectations from STIR markets are that the ECB will raise interest rates from 2% to 2.5% at its next meeting coming up shortly on February 02. The difficulty here with trading the EUR is that there are so many uncertainties from geo-political factors to the USD, the price of natural gas, and the outlook for the eurozone and whether it can avoid a coming recession. This means trading the euro is best left until there is some very clear catalyst.