Commerzbank’s Michael Pfister expects the European Central Bank (ECB) to deliver its first rate hike in months, but notes this is already priced into EUR/USD. He doubts President Lagarde will pre-commit to multiple hikes and highlights cooling Oil prices and softer inflation expectations. Pfister concludes that a hawkish surprise is unlikely and sees Euro (EUR) downside risks dominating near term.

Downside risks against US Dollar after ECB decision

"Today’s ECB meeting is expected to result in the first interest rate hike in many months. This move has already been priced in, so there is unlikely to be much scope for surprises in this regard. The key question is whether the ECB can deliver a hawkish surprise in its statement and subsequent press conference, thereby boosting the euro."

"Even if the ECB were prepared to raise interest rates three times this year, Christine Lagarde is unlikely to commit to that today. She will instead emphasise that the ECB will do everything in its power to ensure price stability. This probably won't be enough to further increase interest rate expectations."

"On the other hand, developments in the oil market have also calmed down somewhat in recent weeks - we are now well past the peak. Combined with lower-than-expected inflation rates in recent months, inflation expectations have also corrected slightly."

"It seems rather unlikely that the ECB will in light of these developments adopt a more hawkish stance than is already anticipated. For the euro, this means that risks are likely to be skewed to the downside today."

"We therefore continue to expect only a slow recovery in EUR/USD, with a level of just 1.16 expected by the end of the month."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)