ECB is ready for lift-off in July

The ECB has held its interest rates flat today. However, it will end its Asset Purchase Programme this month and has guided markets for the start of interest rate hikes. The ECB is ready for lift-off.

Today’s highlights:

  • Rates held steady in June (the main refinancing rate held at zero and the deposit rate held at -0.50%)
  • In June they will wind down the APP to end on 1st July
  • A 25 basis points rate hike will come at the July meeting of the Governing Council.
  • A further interest rate increase in September
  • The Governing Council anticipates a “gradual but sustained path” for further rate hikes, but this could be larger depending upon inflation.

What does this mean?

There was very little expectation of a rate hike today, but there had been some expectation that perhaps the ECB could go harder than 25 basis points in July. Today’s announcement pretty much ends this expectation.

Subsequently, looking at the market expectations for ECB rate hikes approaching today’s decision, there is a temptation for the hawks to be a little disappointed. However, we believe that this should be taken as being in line with expectations. Looking at the statement, a “gradual but sustained path” of hikes is likely to be +25bps at every meeting for the rest of the year. There are four meetings, meaning four 25bps hikes can be expected, or +100 basis points in total. 


100 basis points would leave the deposit rate at +0.50%. From the implied rates above, this is c. 25bps less than expected. However, there is room for more aggressive policy moves later in the year, if the inflation situation “persists or deteriorates. This part of the statement reflects this:

September hikes

This would give the ECB room for a 50bps hike if needed. Subsequently, we see this as being supportive of the market expectation and should help to underpin EUR.


Initial Market Reaction

After initially falling (on the disappointment of no 50bps hike in July), the EUR has been supported by this decision. The important support at 1.0625/1.0640 on EUR/USD has been held, but the bulls are looking higher. Pressure is mounting on the resistance at 1.0760/1.0780.


We have been looking at EURUSD ranging between 1.0625/1.0780 for more than a week now. However, this leaves the EUR in a good position to test and potentially breakout above 1.0780. Tomorrow’s inflation data may also be on the minds of traders as the session continues. However, we believe that this ECB decision should help to add support and underpin the EUR in the days/weeks to come.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.