ECB preview: A tough balancing act just got harder

When is the ECB rate decision?

The ECB interest rate decision is due on Thursday at 12:30pm GMT

The economic picture

The ECB is between a rock and a hard place right now as it will attempt to balance surging inflation against expectations of slowing growth.

Inflation was already at record highs of 5.8% and in some countries within the eurozone above 10%, even before oil prices jumped 30% in just two weeks. Oil prices are still rising, today hitting a fresh 14 year high, and there is no obvious quick manner to bring them down. Wholesale inflation rose to 30.6% in January also pointing to no let-up in consumer price rises.

With the unfolding crisis in Ukraine and as the fallout from the war and sanctions imposed by the West ripples across the globe, growth is also expected to take a hit, bringing fears of stagflation to the forefront.

What to expect?

As a result, hawks at the central bank could pull back on rate hike expectations with the central bank preferring to keep its option open. Moving to tighten monetary policy now risks adding further pain to the economy just as it is emerging from the pandemic and as expectations for growth cool. Forecasts have pointed to the Eurozone economy facing a 1% to 1.5% hit to global growth as both companies and consumers feel the pain of higher energy prices.

That said, even known dove Chief economist Philip Lane highlighted the importance of not allowing high inflation expectations to become entrenched.

However, it is also worth pointing out that the level of uncertainty remains very high, which suggests that adopting a flexible wait-and-see approach could be the best that the ECB could do.

The PEPP, the pandemic era bond-buying programme is set to end this month, and that is unlikely to change, bringing the APP asset purchase programme into focus. With some monthly bond purchases moved to this more tightly regulated programme, then stimulus isn’t being withdrawn too quickly.

Interest rate expectations have been pushed right back from Q4 this year until at least Q1 2023, which explains some of the hit to the euro.

Where next for EUR/USD?

EUR/USD has been forming a series of lower highs and lower lows since the start of the month. The price has picked up off its recent 1.08 low bringing the RSI out of oversold territory. However, the move higher in the RSI appears to have lost steam well below 50. The price also trades below a falling trendline and its 50 and 20 sma which suggests that buying interest is limited.

More weakness can be expected following a break below 1.0850, which opens the door to the 2022 low of 1.08, and beyond there 0.0750 the March 2020 low.

Meanwhile, buyers will be looking for a move over 1.0930 the weekly high to attack 1.10 the psychological level and May 3 low, ahead of 1.1085 the 50 sma.

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