The euro is seeing a bit of a whipsaw amid the ECB policy decision but it is one that mirrors the movement in European bond yields. As the ECB lays out an expected 25 bps rate hike in July, they are leaving the option for a potential 50 bps move in September and that is getting markets riled up a fair bit.
10-year German bund yields have jumped up to 1.42%:
Money markets have now increased bets on ECB rate hikes by year-end, pricing in 140 bps worth of rate hikes as compared to 130 bps coming into the decision today. A full on 75 bps worth of rate hikes have now been priced in by September.
Despite that, the euro’s upside may well be very limited if this is about as good as it gets in terms of hawkish surprises from the ECB today. I don’t see how else Lagarde can spin things into being more hawkish especially considering the market pricing above.
And with EUR/USD unable to look towards 1.0800 or the topside of its recent consolidation range, I fear that we could run into selling pressures as long as other dollar factors stay the course on the week:
Don’t forget that the ECB also raised its inflation forecasts and lowered its growth forecasts in its latest projections today. Stagflation much?