ECB faces close call on interest rates

The ECB will announce its rate decision at 12:15 GMT. ECB President Christine Lagarde will hold a news conference at 12:45 GMT.

By Ahmed Azzam | @3zzamous | 14 September 2023

  • Global markets rally: Markets respond to potential Fed rate pause.

  • Market sentiment shifts: Traders now see a two-thirds chance of ECB rate increase.

  • ECB decision awaited: Focus sharpens on ECB's impending decision with inflation in the spotlight.

Asian stocks and European equity futures experienced a surge as investors' hopes of a Federal Reserve pause on rate hikes gained traction, and anticipation mounted ahead of the European Central Bank's (ECB) critical rate decision.

Euro Stoxx 50 futures displayed a robust 0.3% uptick, ending a two-day downturn, propelled by renewed optimism following the US inflation report, which remarkably aligned with market estimates. Meanwhile, Japanese shares soared by more than 1%, receiving an additional boost after Economic Revitalization Minister Yoshitaka Shindo emphatically emphasized the necessity for robust economic measures.

The US dollar experienced a broad weakening against all of its Group-of-10 counterparts, and Treasury yields exhibited a modest decline. Simultaneously, the euro gained ground against the dollar and the pound as traders anxiously awaited the ECB's pivotal decision. In the realm of Japanese finance, concerns surrounding the potential normalization of monetary policy by the Bank of Japan were alleviated as demand for Japanese 20-year bonds during an auction reached its highest level since May 2020.

In the commodities market, oil prices traded near their highest point since November, spurred by the International Energy Agency's latest warnings of a supply shortfall.

ECB meeting today

Amidst the market's dynamic shifts, an unmistakable narrative emerges in Europe: the continent is grappling with persistent cost pressures, further exacerbated by the dramatic ascent of energy prices. This development has led money markets to embrace the possibility of the ECB raising interest rates by a quarter of a percentage point, now seen as a probable outcome. This sentiment marks a stark departure from earlier this month when market participants were steadfast in their belief that rates would remain unchanged.

The forthcoming ECB decision stands at a precipice, poised to shape the monetary landscape. Inflation persistence is set to play a prominent role in the ECB's revised projections, with core prices displaying an unyielding stance.

Market sentiment presently reflects a roughly two-thirds likelihood of an ECB rate hike. However, even the more dovish voices among market participants contend that rates are only on the cusp of a pause, implying that this sentiment might be too accommodative. The prospect of a hawkish quantitative tightening (QT) surprise looms large, particularly considering the ECB's view that the hangover from quantitative easing (QE) continues to distort bond markets, as highlighted by their warnings of excessively inverted yield curves and unnaturally tight spreads.