Once again, I'll try to keep these posts short and succinct. So, let's get right into it.
All expectations point to no rate hikes today but there will certainly be questions raised on why the ECB is delaying the inevitable. In this instance, it will be important to see whether they will clarify a 25 bps rate hike in July or hint at the potential for more.
There is roughly just odds of ~2 bps priced in for today's meeting, so a rate hike will definitely be a rather hawkish surprise. However, I don't expect the ECB to pull that off given the communique in recent weeks. In that lieu, the bar for a hawkish surprise is on the high side as there isn't much else to work with for the ECB.
What can we expect from Lagarde & co. today then?
The first thing is that we will get the updated macroeconomic projections by the central bank. But that is likely to be a straightforward one, showing higher inflation forecasts and a weaker growth outlook. Next, we should also get some confirmation that the ECB will end asset purchases either at the end of June or early July. That will tee up the move to hike rates next month.
Besides that, there isn't much else to scrutinise from the ECB today. As such, the important detail is whether there will be any hints offered up that the July (and September) rate hike(s) will be anything more than 25 bps.
Knowing the ECB, they are likely to play it coy in order to gain as much "flexibility" as they can. I would expect something along the lines where they reaffirm that a rate hike will come in July but the guidance will lean towards data dependency.
All things being equal, I reckon those looking for more solid hints of a 50 bps rate hike might be disappointed and that could see European bond yields and the euro currency retreat in the aftermath.
But watch out for "leaks" and "sources" reports that could come out later today or tomorrow, which could suggest that there are members in the governing council pushing for a more hawkish communique - leaning towards a 50 bps rate hike in July.
However, how much upside that offers up the euro remains to be seen. A 25 bps rate hike for both July and September are already fully priced in and there's roughly 130 bps worth of rate hikes baked into the pricing for year-end already.
To put short, the risks going into the meeting are skewed more towards Lagarde disappointing the hawks considering that the bar for any real surprises is rather high. However, that doesn't mean she won't be able to pull it off though.
