3 things to consider ahead of tomorrow’s ECB Meeting

By:
on Jul 20, 2022
  • ECB to raise rates tomorrow
  • Parity still matters for EUR/USD
  • Press release times changed

Tomorrow’s European Central Bank (ECB)’s decision may be one of the most important ones in years. So many things are at stake, that it is hard to focus on what will matter the most for the markets.

But if we are to pick three of the things to concentrate on, here they are:

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  • ECB changed the release times for the interest rate decision and the press conference
  • The parity level looms large
  • Will we see a 25bp or a 50bp rate hike?

Press release times changed

An interesting fact about tomorrow’s interest rate decision and press conference is that the press release and starting times changed. The ECB announced that it changed the interest rate announcement time from 13:45 CET to 14:15 CET (basically half an hour later), and that the press conference will start at 14:45 CET.

Two things are worth mentioning here.

First, the lag between the two (i.e., the interest rate decision announcement and the press conference) shrinks to half an hour instead of 45 minutes.

Second, the press conference is pushed more into the North American trading session. Because the ECB decision is critical to financial markets, the central bank moves closer to addressing both sides of the Atlantic ocean with this change.

Parity looms large

Earlier this month, the EUR and the US dollar reached parity. That is, one euro equals one dollar.

As exciting as it may be for US citizens planning a holiday in Europe, the parity level is critical for traders. Since late 2021, the EUR/USD exchange rate dropped from above 1.24 to parity (i.e., 1.000) and even below, as we’ve seen this June.

But is this a one-time thing or just the first test?

Judging by the amplitude of the move, the bias is that the EUR/USD will test the parity again, and the first reaction was just that – a reaction to a critical level.

25bp or 50bp rate hike?

Finally, there is much of a debate regarding what the ECB will do. Is it going to be a 25bp rate hike or a 50bp one?

Sure enough, the markets will react strongly to either of the two in the very short term. A 25bp would be seen as a disappointment, while a 50bp hike as the ECB starts to frontload rates.

But in the end, only the interest rate differential matters for traders. Even with a 50bp rate hike, the deposit facility rate would be zero, whereas it is much higher in the US.

Hence, any bounce in the EUR/USD exchange rate should be faded. The ECB is in a tough spot, and raising rates by more than the market expects would not solve immediate problems.

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