Event Guide: ECB Monetary Policy Statement (September 2023)

Can the ECB squeeze in one more interest rate hike for the road?

Or are they done tightening this time?

Here’s what market watchers are expecting for the September ECB decision and how the euro might react.

Event in Focus:

European Central Bank (ECB) Monetary Policy Statement

When Will it Be Released:

September 14, Thursday: 12:15 pm GMT

ECB President Lagarde will conduct a presser 30 minutes later.

Use our Forex Market Hours tool to convert GMT to your local time zone.

Expectations:

• Odds seem to slightly lean towards the ECB hiking the interest rate from 4.25% to 4.50%
• ECB head Lagarde is expected to provide some forward guidance on whether or not they’re open to resuming their rate hikes sooner or later

Relevant Eurozone Data Since Last ECB Statement:

🟢 Arguments for Tighter Monetary Policy / Bullish EUR

Eurozone flash headline CPI unchanged at 5.3% y/y in August vs. estimated dip to 5.1%, flash core CPI down from 5.5% to 5.3% as expected

German preliminary CPI showed another 0.3% m/m gain in August as expected, French preliminary CPI came in stronger than expected at 1.0% m/m vs. estimated 0.7% uptick

July ECB meeting minutes revealed that some policymakers were more concerned about inflation not returning to target than the possibility of a recession, citing that “In view of the prevailing uncertainties and the large costs of bringing inflation down once it had become entrenched, it was argued that it was preferable to tighten monetary policy further than to not tighten it enough.”

French flash manufacturing PMI rose from upgraded 45.1 reading in July to 46.4 in August vs. 45.1 forecast, German flash manufacturing PMI rose from 38.8 to 39.1 vs. 38.9 estimate

🔴 Arguments for Looser Monetary Policy / Bearish EUR

ECB head Lagarde mentioned in July ECB presser that both a rate hike and a pause were possible for the next meeting, reflecting a shift from an aggressive to a more cautious bias

German factory orders slumped by 11.4% m/m in July vs. estimated 4.3% drop, earlier 7.6% gain (upgraded from initially reported 7.0% increase)

Eurozone retail sales fell 0.2% m/m in July vs. expected 0.1% dip, previous 0.2% uptick (upgraded from initially reported 0.3% decline)

Sentix investor confidence index fell from -18.9 to -21.5 in September vs. estimated drop to -19.6

French flash services PMI slumped from 47.1 in July to 46.7 in August vs. 47.5 consensus, German flash services PMI tumbled from 52.3 to 47.3 to reflect a shift from growth to contraction

German Ifo business climate index down from 87.4 to 85.7 in August vs. 86.3 forecast

Previous Releases and Risk Environment Influence on EUR

July 27, 2023

Action/Results: The ECB hiked interest rates by 0.25% from 4.00% to 4.25% as expected.

However, what took the markets by surprise was Lagarde’s hint that both a pause and a hike are on the table for their next meeting, as this represented a shift away from their very aggressive tightening stance.

The euro was already on shaky footing earlier on when the region printed mostly downbeat PMI figures, before some consolidation took place ahead of the ECB decision.

Not surprisingly, the shared currency sold off sharply against most of its peers when the central bank toned down their hawkishness by a notch.

Risk environment and Intermarket behaviors: Risk-off flows came into play early in this trading week when global PMIs surprised mostly to the downside.

Higher-yielders caught a bit of reprieve from rumors of more stimulus from China’s central bank and government, but the rallies were reversed when the FOMC stuck to its stubbornly hawkish stance.

June 15, 2023

Action/Results: The ECB delivered on another 0.25% interest rate hike as expected, bringing the benchmark rate up to 4.00%.

As in their earlier decisions, ECB head Lagarde reiterated their upbeat outlook and the likelihood of another interest rate hike in July.

With that, the euro broke out of its consolidation from the first half of the week to rally mostly against the yen and the dollar.

Risk environment and Intermarket behaviors: Risk-taking was the name of the game early in the week, as traders began placing their bets for a less-hawkish-than-usual Fed decision.

Rate cuts from the PBOC also helped lift risk appetite midweek, along with downbeat Chinese data reinforcing the need for even more stimulus.

Higher-yielders returned some of their gains when the FOMC dropped hints about resuming their tightening cycle soon, but the pro-risk lean seemed to last until the end of the week.

Price action probabilities

Risk sentiment probabilities: Risk-on flows have been observed early this week, thanks to the PBOC’s forex moves and some positive updates on China’s bank loan data.

And the tone is somewhat mixed the release of the highly-anticipated U.S. CPI report, which came in above expectations and previous reads on most counts. Equities and crypto are observably higher while the U.S. Dollar index flirts with pre-event levels. Bond yields, oil and gold drift lower.

With such a mixed reaction, it’s tough to gauge the general feel of how risk sentiment may play out around the ECB release.  But at the moment, if feels like the market still thinks that we’re at peak rate hike cycle, which may give a very slight edge to risk-on bias traders for now.

Euro scenarios

Base case: Euro traders have been pricing in the possibility of a tightening pause for this month’s ECB decision, especially since the latest batch of data point to slowing business and consumer activity.

However, it’s also worth noting that measures of inflation are still somewhat elevated, highlighting remarks from policymakers that they’d rather prioritize driving price pressures down and are willing to risk a soft landing.

That said, the odds slightly favor another 0.25% interest rate hike this time, but Lagarde’s following comments may emphasize that this might be the last one for a while.

If that’s the case, we could see a slight pop higher for the euro on profit-taking during the official announcement, but intraday gains might be quickly reversed during the presser.

In this scenario, keep an eye out for opportunities to fade a quick EUR rally on major resistance levels against currencies with more hawkish central banks (GBP) or comdolls (AUD, NZD, CAD) if risk-on flows are in play.

Alternative Scenario 1 & 2: The ECB might decide to “skip” an interest rate hike for this month while still emphasizing that this is a “hawkish hold” situation.

After all, policymakers might give some leeway for economic activity to pick up again before resuming their efforts to ward off stubborn inflationary pressures.

If so, market players could potentially place the ECB back among the more hawkish central banks, along with the Fed and BOE. In this case, stay on the lookout for a chance to hop in longer-term EUR rallies against currencies with more dovish central banks like JPY.

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