The European Central Bank (ECB) will have its next board meeting on March 16. Analysts at Danske Bank expect the central bank’s deposit rate to peak at 4%, after a 50 basis points interest rate hike, in both March and May followed by a 25bp hike in both June and July.
FX reaction depends on the growth backdrop
“We adjust our expectations for the policy path from ECB and now expect a policy peak rate of 4% (deposit rate), with hikes of 50bp in March, 50bp in May, 25bp in June and 25bp in July. We naturally remain data dependent and may adjust the call at a later stage, but for now we see the risks around our baseline rate hike expectations as broadly balanced. Our revision comes on the back of more resilient economic activity and more ‘sticky’ underlying inflation developments.”
“To the extent markets begin to shift focus from an improved short-term outlook to the price of growth to be paid further out, then EUR/USD is likely to follow back sharply again. We maintain a 6M target on EUR/USD of 1.02 while we acknowledge some topside risk to our 1M projection of 1.06.”