Euro: Mixed outlook as ECB weighs energy shock – Commerzbank

Norman Liebke at Commerzbank notes the ECB delivered a widely expected pause, while Christine Lagarde signalled that another rate hike in December remains possible and largely priced in. The Euro’s path beyond December will hinge on energy prices and potential second-round effects on wages and inflation expectations. Higher bond yields already tighten financing conditions, limiting scope for an extended hiking cycle.

ECB pause but December still live

"The ECB delivered the largely expected pause at yesterday’s meeting. However, ECB President Christine Lagarde made it clear that, in light of higher energy prices, the Governing Council had indeed discussed another rate hike. She also left the door open to a third rate increase this year in December."

"Our economists also expect a rate hike at the end of the year. However, the message contained little that was new for markets, as a December hike is already largely priced in and rate expectations changed only marginally following the meeting."

"For the euro, therefore, the more important question is likely to be what happens after December. Much will depend on energy-price developments."

"As things stand, the ECB will probably have to revise its oil and gas price assumptions from the September projections higher in December. The key question, however, is whether the energy-price shock also feeds through to underlying inflation."

"For the euro, the picture therefore remains mixed: if energy prices remain high and signs of second-round effects increase, the market could once again price in more rate hikes, benefiting the euro. If, by contrast, price pressures remain largely confined to energy, the bar for further rate hikes after December is likely to remain high and the euro’s additional upside potential limited, especially as energy inflation is likely to partly decline again next year due to base effects."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)