As things stand, markets are pricing in roughly 81% odds of the ECB hiking by 25 bps today. The other 19% odds are siding with a 50 bps rate hike, so there's pretty much only two options on the table for the central bank.
Let's take a look at each decision and see how the ECB might communicate them, and how hawkish policymakers may sound.
If they do go with a 25 bps rate hike, I would expect Lagarde to keep the options open for June and July - even if they may not explicitly lay out any forward guidance on that. It will be a similar approach to how they managed the market expectations coming into today's decision.
In this regard, they should just reaffirm the bias to keep tightening, if they see fit, but also flex that they will be data-dependent at the end of the day. This just means no promises but the hawkish members should continue to tout more rate hikes to follow in the months ahead.
As for a 50 bps rate hike, that would be a surprise and on the initial reaction, expect that to send the euro and regional bond yields soaring. While the decision in itself is a hawkish one, we could see the ECB tone down their aggressive rhetoric. I mean, we are at the point where the terminal rate is thereabouts already and a 50 bps move will be pushing the limit on that.
So, if the ECB does go with a 50 bps rate hike, it just means that a pause in the tightening cycle will draw nearer. For now, markets are pricing in two more 25 bps rate hikes - one in June and one more by September at least - after today's supposed hike.
If a 50 bps surprise does come and markets sense that a pause may be the next imminent step, it may not necessarily translate to a more hawkish outlook for the euro in the bigger picture.
Just some food for thought.
