The ECB opted for a cautious tone in light of energy price volatility yesterday, but President Christine Lagarde’s press conference had a hawkish undertone as she conveyed a sense of heightened concern for upside risks to inflation. But even more importantly, Bloomberg later reported that ECB officials are already considering a rate hike in April should inflation rise too far above target.
That can be a game-changer. Despite the recent hawkish repricing, markets were pricing in a hike only from June before yesterday. The reasoning was that the ECB would have needed a couple of months of data to assess second round effects. Putting April on the table (now 15bp priced in) means that the ECB may be ready to act aggressively and pre-emptively, intuitively raising the chances of back-to-back increases.
Our economists aren’t ready to pencil in a rate hike yet as a positive turn in the war and energy prices can still discourage the hawks. But the chances of a hike have undoubtedly increased, which raises the upside potential for the euro beyond the near-term impact of energy prices.
Speaking of which, gas prices have eased back after yesterday’s spike, but Iran’s attacks on Qatar’s LNG facilities are now estimated to cause a loss of 12.8m tons per year (roughly 3% of global production) for three to five years. Further EUR gains from here depend on no additional major shocks to gas supply.
We think caution is very much warranted in EUR/USD at this moment, as the pair seems to be trading a bit too strong considering where oil and gas prices are. But should we see some de-escalation over the weekend, EUR/USD could be eyeing 1.170 soon, backed by a hawkish ECB message.
Francesco Pesole