ECB interest rate hike: Supersize or Jumbo?

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ECB preview: The big question this month is not whether the ECB will increase but whether it will be 50 or 75 basis points?

An increase of 50 or 75 basis points?

The ECB raised interest rates by 50 basis points at the July meeting, the first rate hike in 11 years. The big question this month is not whether the ECB will increase but whether it will be 50 or 75 basis points?

Expectations that the ECB would raise rates again were already firmly in place before last week’s data showed inflation hit a record high and unemployment fell to a record high. Since then, we’ve heard from several ECB officials who support a forward-looking approach to rate hikes to avoid a 1970s inflationary spiral.

There are strong arguments on both sides for a 50 or 75 basis point hike.

The ECB is catching up on rate hikes, and a 75 basis point hike would send a clear message about inflation being under control. Additionally, the window in which aggressive hiking can take place is shrinking as the region tumbles toward recession.

Following Putin’s gas cut through the Nord Stream 1 pipeline, gas prices are expected to remain high, meaning inflation has still not peaked, and Christine Lagarde may be reluctant to say when it will peak. maximum. Double-digit inflation in the fourth quarter seems very likely.

Meanwhile, some ECB policymakers would prefer to hike 50 basis points and use this meeting to discuss a bigger move in future meetings – a more orderly approach.

There is also the fear that bigger interest rate hikes will mean a faster decline into recession and the sooner the bank will have to stop the rise. Could a smaller approach for longer cushion the blow to the eurozone economy?

Concerns about the weakness of the euro?

At the previous ECB meeting, politicians had expressed their concerns about the weakness of the euro. A move below parity since then will add to these concerns, especially as a weaker euro brings inflationary pressures.

What future for the EUR/USD?

EUR/USD found support at the falling trendline yesterday and pushed higher, but the outlook remains bearish. The pair is trading below its downtrend 20 & 50 sma, and the RSI remains below 50 supporting further losses as it remains out of oversold territory.

To stage a rally, buyers need to rally above 1.0100, last week’s high, to expose 1.0160, the 50 moving average.

Meanwhile, bears may look to test 0.9877 yesterday’s low to extend the downtrend towards 0.98.

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