2 reasons to fade any ECB hike next week

By:
on Jul 17, 2022
  • ECB to hike next week
  • Euro to underperform still
  • The war in Ukraine weighs on the common currency

Europe is in the spotlight this year. Russia invading Ukraine in late February led to a wave of sanctions from Western nations against the invader.

But the sanctions have hurt European economies too. And they will hurt them some more in the months to come.

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In other parts of the world, things are different. Say, in Canada, the United States, or Australia.

What is common for all advanced economies is a higher inflation rate. Inflation in the United States approaches double digits – but so does in Europe, on top of the war in the Eastern territory.

As such, investors fled the common currency and bought other ones, starting with the US dollar. Therefore, the euro’s weakness is not surprising and will likely continue for at least a couple of reasons, even if the ECB hikes the interest rate next Thursday:

  • ECB lags behind other central banks
  • EUR/USD is in a bearish trend

ECB lags behind other central banks

Except for the ECB, all other major central banks in the world have already lifted their interest rates from the pandemic lows. For instance, the Federal Reserve hiked several times, the Bank of England as well, and the Bank of Canada surprised everyone last Wednesday when it delivered a full 100bp rate hike.

Only the Bank of Japan sits tight, which is probably why the EUR/JPY exchange rate is higher in 2022. But except for the Bank of Japan, the ECB lags behind other central banks regarding the interest rate level.

The chart below speaks for itself.

Next Thursday, the ECB is expected to raise the interest rate by 25bp. Even if it goes the “Bank of Canada way” and surprises with a 50bp rate hike, it would still lag other central banks.

Moreover, the Federal Reserve is due the week after the ECB Meeting, and the chances are that it will increase the funds rate by at least 75bp.

Hence, no matter what the ECB does, the other central banks are set to outpace its rate hikes.

EUR/USD’s bearish trend in 2022 continues

The second reason to fade any possible euro rally on the back of an ECB rate hike is the EUR/USD’s bearish trend. This is a currency pair that has declined throughout the year so far, with no signs that the trend will end anytime soon.

As such, with the series of lower lows and lower highs intact, the path of least resistance for the EUR/USD remains the downside. Hence, any possible bullish reaction from the upcoming ECB Meeting should be taken with a grain of salt.

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