Further ECB tightening 'unwarranted'

Matthew Ryan, CFA Ebury

ECB President Christine Lagarde struck a relatively hawkish tone in her remarks at the Sintra conference this week.

As she did following the June Governing Council meeting, she stressed that the recent rate hike was a deliberate response to a genuine inflation problem, rather than merely an insurance move. She also warned that future inflation shocks would keep coming, and that interest rates - rather than unconventional policy tools - would remain the primary lever for dealing with them.

That said, we remain unconvinced that further ECB tightening is warranted from here. As Lagarde herself noted, the bank no longer needs to act with the same force it did following the 2022-23 energy spike, with the temporary nature of the current oil supply disruption, alongside slack in the labour market, likely to keep second-round inflation effects contained.

At the time of writing, swaps markets are pricing in around an 80% chance of another 25 basis point hike from the ECB in September - leaving room for further downside in the common currency, should the bank ultimately fall short of those expectations.

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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