EUR: Nascent ECB rate hike talk is unambiguously positive - ING

The euro found some support yesterday following a Reuters report stating that ECB officials have conceded that QE purchases will likely end later this year and are now shifting the debate internally to the future path of rate increases, explains Viraj Patel, Research Analyst at ING.

Key Quotes

“The report also noted that policymakers are content with market expectations for the first ECB depo rate hike in mid-2019. It’s somewhat ironic that the unnamed sources talking about rate hikes stressed concerns over markets – in particular the euro – front-running any ECB policy normalisation; the fact that short-term EZ rates and the currency nudged higher following this report suggests that this may have been a bit of an ‘own goal’ by the ECB sources. Still, we see ECB rate hike talk as unambiguously EUR positive – especially in a market that is heavily distorted and underestimating the central bank’s next policy steps.”

“One simply needs to look at the short-term 3-year forward EZ OIS rate, which remains circa 40bps below when the ECB first started easing policy in mid-2014, to see why the risks are asymmetrically skewed to the upside when it comes the EUR and ECB policy. Look for EUR/USD to remain supported in the 1.23-1.24 area today.”