Excessive pricing for ECB terminal rate

Matthew Ryan, CFA Ebury

Growth momentum indicators like the PMIs continue to paint a picture of economic resilience in the euro area that, together with core inflation still running above target and the Iran war dragging on without a clear ending in sight, gives the ECB sufficient justification to keep raising rates.

A 25 basis point hike from the Governing Council this week is fully priced in by swap markets, so anything less would be not just a major shock but a big disappointment for investors. The more important question for currency markets is whether there is any pushback against expectations for a 3% terminal rate in 2027.

We think this pricing is excessive, particularly as any further hikes beyond this month's meeting would push the terminal rate into restrictive territory - a move too far, in our view, given the growth risks and the fact that the inflation problem remains almost entirely due to supply-side issues.

The common currency, however, continues to trade mostly off the news in the US for now, so we expect limited fallout from the meeting’s headlines.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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