Event Guide: ECB Statement – May 2023

Can’t get enough of central bank decisions? The European Central Bank is up next and the word around town is that we’ll see another rate hike.

Planning on trading the event?

Here are the important points you need to know before working on your trade plan:

Event in Focus:

European Central Bank (ECB) Monetary Policy Statement

When Will it Be Released:

May 4, Wednesday: 12:15 pm GMT, 1:15 pm London, 8:15 am New York, 9:15 pm Tokyo

ECB will conduct a press conference 30 minutes later.

Check our Economic Calendar to see what time the reports come out in your time zone!

Expectations:

• ECB to raise its refinancing rates by 25 basis points to 3.75%
• ECB President Lagarde will likely reinforce the central bank’s data dependency and probably recognize the impact of previous rate hikes and euro area banks’ tighter credit standards

ECB members have been affirming a May rate hike for a while, but traders weren’t clear on whether to price in a 25bps or a 50bps hike.

…until this week. Headline inflation accelerated from 6.9% to 7.0% in April, but the core reading – which excludes food and fuel prices – slowed down from 7.5% to 7.3%.

An even narrower measure, which excludes alcohol and tobacco, decelerated from 5.7% to 5.6% and marked its first deceleration since June 2022.

Meanwhile, a lending survey by ECB printed earlier today noted that the credit standards of euro area banks “tightened further substantially” in Q1 2023, so much so that “the pace of net tightening in credit standards remained at the highest level since the euro area sovereign debt crisis in 2011.”

With inflation sloooowly decelerating, euro area banks effectively tightening on their own, and the Fed likely pausing its own rate hikes after May, the ECB may have enough room to signal less aggressive tightening plans in the foreseeable future.

Relevant Eurozone Data Since Last ECB Statement:

Arguments for Tighter Monetary Policy / Bullish EUR

Germany raised its 2023 growth forecasts from 0.2% to 0.4% on stronger-than-expected manufacturing at the start of the year

European Central Bank Vice President Luis de Guindos stated on Apr. 26 that the euro-area may avoid recession

ECB Chief Economist Lane said on Apr. 24 that current data warrants another interest rate hike at the ECB’s next meeting in May

Euro Area Economic Sentiment Indicator (ESI) for April: 99.3 (99.8 forecasts) vs. 99.2; European Union ESI was unchanged at 97.3

Improved business expectations helped push Germany’s Ifo business-climate index from 91.1 to 93.3 in March, its highest reading since May 2022.

Euro area Flash CPI read for March 2023: 6.9% y/y vs. 8.5% y/y read in February; core hits record high of 5.7% y/y as expected vs. 5.6% y/y previous

Flash Eurozone Services PMI for March: 55.6 vs. 52.7

Arguments for Looser Monetary Policy / Bearish EUR

German ZEW economic sentiment index slipped from 13.0 to 4.1 in March vs. estimated improvement to 15.5, as banking sector woes dampened the credit outlook

Eurozone ZEW economic sentiment index fell from 10.0 to 6.4 in March to reflect weaker optimism

Euro area final inflation read for March: -6.9% y/y as expected; -8.3% y/y as expected in the European Union

Flash Euro area Consumer Confidence for April: -17.4 vs. -19.1 in March

HCOB Flash Eurozone manufacturing PMI for April: 45.5 vs. 47.3 previous: Services PMI at 56.6 vs. 55.0 previous

Germany Flash GDP for Q1 2023: 0.0% q/q (0.1% q/q forecast) vs. -0.5% q/q previous read (revised lower from -0.4% q/q)

According to Chief Economist Philip Lane in an interview with Zeit on Mar. 29, the European Central Bank will need to raise interest rates even more if recent financial system tensions are kept in check.

HCOB Eurozone Manufacturing PMI for April: 45.8 vs. 47.3 in March

Germany’s retail sales down by another -2.4% m/m in March vs. a downwardly revised -0.3% in February, 0.4% expected

Previous Releases and Risk Environment Influence on EUR

Mar. 16, 2023

Overlay of EUR Pairs: 1-Hour Forex Charts by TV

Action/Results: As expected, the ECB raised its main refinancing rates by another 50 basis points to 3.50% in March.

The ECB staff also released its latest projections (made before the banking sector tensions peaked) showing headline and core inflation averaging 5.3% (from 6.3%) and 4.6% in 2023 respectively. Meanwhile, 2023 growth was revised higher from 0.5% in December to 1.0% on better-than-expected energy and “international environment” developments.

In her presser, ECB President Lagarde said that the central bank will now be “data dependent.” She also assured that the euro area banking sector is “resilient,” and that ECB has the tools and facilities and is ready to respond “as necessary” if needed.

Risk environment and Intermarket behaviors: Concerns over Credit Suisse peaked days before the ECB’s decision, so assurances that the euro area’s banking sector is “resilient” and that the ECB has the tools ready to deploy helped calm banking jitters.

Higher euro area interest rates, combined with increased confidence in the Eurozone’s banking sector, helped pull EUR from its intraday lows. The common currency ended the day only slightly lower than its major counterparts.

Feb. 2, 2023

Overlay of EUR Pairs: 1-Hour Forex Charts by TV

Action/Results: As expected, ECB raised its interest rates by 50 basis points to 3.00% in February. The central bank was also clear that it planned another 50bps rate hike in March before going “data dependent” in its succeeding meetings.

Risk environment and Intermarket behaviors: Risk-taking was already gaining momentum at the time of the ECB statement, thanks to the Fed being less hawkish than markets had expected earlier that week.

The ECB’s talk of being data-dependent in the foreseeable future reinforced the idea that the major central banks are now open to adjusting their tightening plans if their inflation goals are on track.

Price action probabilities

Risk sentiment probabilities: With the RBA surprising markets with a 25bps rate hike earlier on Tuesday, the persistence of high inflation underscored the (very real) possibility of central banks raising their interest rates again after a pause.

Unless the Fed fails to communicate its own readiness to tighten further, broad market sentiment will likely take cues from earnings and PMI data, likely to price in slower global growth amidst higher interest rates if they come in shaky.

Euro scenarios

There are many potential price action scenarios this week due to a higher level of uncertainty with 25 bps and 50 bps hike on the table, and especially after the RBA surprised the markets with a interest rate hike. For Base Case 1 and Alternative Scenario 1 below, we’re assuming the ECB hikes by 25 bps.

Base case 1: If a 7.0% inflation is “too high” for the RBA, then the euro area’s 7.0% headline CPI might also make ECB members uncomfortable. They’ll likely raise their interest rates by 25 basis points to 3.75%.

In her presser, Lagarde could possibly recognize the tightening impact of ECB’s previous rate hikes and higher credit standards for euro area banks BUT also emphasize ECB’s commitment to bring inflation down. She might even hint at future rate hikes and kill speculations of rate cuts until at least mid-2024!

If ECB members hint at tighter policies or a long battle against high inflation, then it could gain pips against currencies with central banks on rate hike pauses like CAD or NZD, especially if the euro continues to lose ground ahead of the event.

Alternative Scenario 1: If Lagarde and her team note and focus on the the slowing pace of core inflation, or if they share their concerns over tighter bank lending standards and slowing economic activity, then traders could price in fewer ECB rate hikes.

That means short EUR trade ideas against safe havens like USD and JPY should be your homework after the event. Also remember that the U.S. has several major catalysts this week, so be careful when planning out any ideas involving the Greenback this week.

Alternative Scenario 2: Due to inflation rates staying frighteningly high, there is still some possibility of the ECB hiking by 50 bps. And if they signal an aggressive tightening lean going forward, then doing some work on long EUR ideas against CAD and NZD makes sense once again, or even against the low-yielders like JPY and CHF.

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