European Central Bank: Cautious path to further hike – BNP Paribas

FXStreet Insights Team FXStreet

BNP Paribas analysts assess recent European Central Bank (ECB) communication from Sintra, highlighting Christine Lagarde’s cautious stance and shift toward “framework guidance” in a volatile environment. Despite softer inflation data and easing energy prices, they still expect one more ECB rate increase in September, while noting that inflation risks have shifted slightly to the downside but not enough to change the policy path.

ECB weighs risks after energy shock

"We maintain our scenario of an additional ECB rate hike in September, despite the easing of inflation risks, which makes such a move less likely."

"Faced with this uncertainty, the ECB president advocated for a communication style she referred to as “framework guidance”: an approach centred around scenarios and less prescriptive regarding the future rate paths compared to traditional “forward guidance”."

"For her part, Christine Lagarde, participating in a panel discussion alongside Andrew Bailey (Bank of England), Kevin Warsh (U.S. Fed) and Tiff Macklem (Bank of Canada), defended the June rate hike as fully justified, while acknowledging that the risks to inflation and growth now appear more balanced (less upside risks to inflation, less downward risks to growth). "That does not mean the June hike was a mistake."."

"In summary, the overall balance of inflation risks now appears to lean slightly more towards the downside than it did a few weeks ago, but not enough to warrant a change in monetary policy direction."

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

Author

FXStreet Insights Team

FXStreet

The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.

AUD/USD holds above 0.6950 as bullish USD caps gains

AUD/USD edges lower during the Asian session on Tuesday, stalling a two-day recovery move from a two-month low, touched last week. An extended rout in the fixed income market keeps US bond yields elevated near multi-year highs. This, along with geopolitical uncertainties, helps the US Dollar retain its bullish tone despite receding October Fed hike bets. However, expectations for another RBA rate hike this month could act as a tailwind for the Aussie.

USD/JPY remains confined in a range; 158.00 holds the key

USD/JPY extends its consolidative move during the Asian session on Tuesday, trading below 158.00 amid diverging forces. Hawkish BoJ expectations support the Japanese Yen amid looming intervention risks. Meanwhile, geopolitical uncertainty and elevated US bond yields keep the US Dollar near its YTD high despite receding October Fed hike bets. This, in turn, holds back traders from placing aggressive directional bets.

Gold holds steady below $4,150 as receding Fed hike bets lend support

Gold continues its struggle to gain any meaningful traction, holding steady below $4,150 during the Asian session on Tuesday. Receding October Fed hike bets act as a tailwind for the non-yielding bullion, though a bullish US Dollar caps the upside. Furthermore, traders await the release of the FOMC Minutes on Wednesday for more cues about the future policy path and some meaningful impetus.

Ethereum: BitMine scoops extra ETH tokens following Q3 outperformance

Ethereum (ETH) treasury firm BitMine Immersion continued its buying streak of the top altcoin last week. The firm acquired 15,112 ETH, lifting its holdings to 6.016 million ETH, representing 4.9% of ETH's circulating supply and worth $16.16 billion at the time of writing. That brings the company roughly 98.5% closer to acquiring 5% of ETH's supply, a goal it tags "Alchemy of 5%."

Markets just priced out rate hikes on financial stress. This chart shows why 2022-23 says they’ll be wrong

Traders have taken about one quarter-point hike out of their European Central Bank forecasts since mid-September, betting the ECB will stop raising rates because of a French debt selloff. The same bet failed twice in 2022 and 2023, when the ECB kept raising rates through financial stress because inflation was above its 2% target. Euro-area inflation came in at 3.8% in September.

Eurozone inflation just hit 3.8%, its highest in three years. This chart shows why the ECB can’t simply hike its way out

The ECB would normally have a relatively straightforward answer to inflation running almost twice its target: raise interest rates. But these are not normal circumstances. This time, the bond market is already doing part of the tightening for it, leaving the ECB facing an increasingly difficult dilemma.