While on Thursday, March 16, eyes will be on the ECB interest rate decision, and we are waiting for a 50 bps rate hike, I must emphasize that the liquidity position of the Eurozone banking sector appears to have improved in recent years, suggesting more of a balance between banks’ deposits base and loans extended to customers. That means we should not panic about the banking sector, at least in Europe.
With an expected 50 bps rate hike, ECB will be the most hawkish central bank in the world. Since policymakers have already communicated and somehow confirmed a 50 bps rate hike market already priced that, their outlook and announcement tone will be necessary. Since the ECB’s last meeting, policymakers have arguably turned more hawkish. Not just for this meeting, the European central bank is planning to raise rates even more over the next few meetings to bring inflation back down to target ranges. Therefore, after this 50 bps rate to 3%, we expect to have two more 50 bps rate hikes and probably one 25 apps before ending the rate hike cycle at 4.50%, as an ECB’s Deposit Facility Rate.
With inflation primarily driven by wage gains and gradually softened, the Deposit Rate could be lifted toward a terminal rate above 4.00%. The Focus of the day, in fact, should be on forward guidance provided by the ECB statement. Also, ECB President Lagarde’s press conference immediately after the monetary policy decision should be watched to learn how she analyses the market condition, especially considering the current banking conditions on the other side of the Atlantic Ocean.
The market priced the 50 bps rate hike as a reaction, so the natural reaction will be based on the announcement tone and president Lagarde’s comments. According to ECB members’ comments in recent weeks, we expect a hawkish tone, which means that Euro can gain some strength against its rivals. Against USD, EURUSD technical chart is flat. 20 EMA crossed the 50 EMA to the bottom, signaling a downtrend, but RSI around 50 levels, says that bears do not have enough strength to go forward. 20 DMA at 1.0730 is the first resistance; a return above this level can increase prices. Conversely, keeping the level below the 50-period average, the next target for bears will be 1.0350.