Who does the ECB think? – Commerzbank

Listening to ECB President Christine Lagarde, we get the impression that another ECB interest rate hike as early as October is highly unlikely. Of course, Lagarde does not rule anything out. And why should she? It has nothing to gain from limiting options. Observers who still bemoan the lack of forward guidance have failed to understand what is different today from the days when interest rates were locked at the lower bound, notes Ulrich Leuchtmann, head of FX at Commerzbank Commodity Research.

Considerable gap between current EUR/USD level and 1.14

“Yesterday’s communication sounded very much like an October break. The ECB’s HICP inflation projection was unchanged; the market panic over falling inflationary expectations is not shared by the European monetary authorities. On the contrary, the forecast for core inflation in 2024 and 2025, which is particularly relevant for the inflation outlook, has even been revised slightly upwards. The ECB could not have done more to counter recent changes in market expectations.”

“Those who believe in moderate deflation, rather than the collapse in inflation that the market is currently assuming, will have to conclude that the ECB’s interest rate cuts will not be as swift or as pronounced as the market is currently assuming. From this perspective, the fact that ECB expectations did not change significantly yesterday only shows that further adjustment is needed. This applies to inflation and ECB expectations as well as EUR exchange rates.”

“Whether the majority of the market or those who do not believe in dramatic disinflation are right will become clear in the next few months when additional inflation data is released. As our economists tend to agree with the ECB’s view on inflation, I feel vindicated in our bullish EUR/USD view from a EUR perspective, and quite pleased that the market is not immediately following our view. Despite the USD weakness, there is still a considerable gap between the current EUR/USD level and our target of 1.14.”