The market’s expectation of the European Central Bank (ECB) hiking interest rates at its September 14 meeting has significantly decreased, with only a 30% chance of a rate hike now. This change in sentiment can be attributed to three key factors. Firstly, a report citing ECB sources stated that momentum was building for a pause in rate hikes. Secondly, ECB’s Isabel Schnabel commented on the visible moderation of economic activity and weak forward-looking indicators. Lastly, ECB Vice President Luis de Guindos highlighted data indicating an economic deceleration in the third quarter. These reports suggest that the ECB remains dependent on data when considering further rate hikes.
This week, relevant data released included German inflation numbers and core eurozone inflation data meeting estimates. While the focus initially shifted to the German inflation figures, the market’s attention then shifted to the softening survey data and the potential for further inflation decrease, as mentioned by Schnabel. As a result, the euro experienced a decline of 86 pips, erasing more than half of its three-day gain at the beginning of the week. The market’s reaction reflects a decreasing confidence in the possibility of a rate hike by the ECB.
Overall, the market sentiment regarding the likelihood of the ECB raising interest rates at its upcoming meeting has significantly shifted, with only a 30% chance currently. Reports citing ECB sources, comments from ECB officials, and the release of relevant data all point towards a potential pause in rate hikes due to a visible moderation in economic activity and weakening forward-looking indicators. As a result, the euro has experienced a decline in value.