Markets grow skeptical that the ECB will hike rates again, weighing on the euro

Last week the market was placing higher odds on the ECB hiking rates than leaving them unchanged at the Sept 14 meeting but now there’s just a 30% chance of a hike. What changed?

Three stories have done the majority of the lifting:

  • On Friday, an ‘ECB sources’ report said momentum for a pause in its rate hikes was building
  • Today, the ECB’s Schnabel said activity has moderated visibly, and forward-looking indicators signal weakness ahead
  • Today, ECB vice president Deguindos said the Latest data from July and Aug point towards economic deceleration in Q3

All those reports kept the door open to hiking rates further and pointed to data dependency. Here are the relevant numbers released this week:

The German inflation numbers gave the market something to think about but after digesting today’s data, the focus was on core eurozone inflation data meeting estimates. Given that survey data is softening, there are reasons to believe that inflation will come down further, something Schnabel talked about today:

Activity has moderated visibly, and forward-looking indicators signal weakness ahead…While strong pent-up demand for services has been able to offset the drag on growth coming from industry so far, reported orders and activity in the services sector are now declining, too.

The result is that the euro is down 86-pips today, erasing more than half of the three-day gain to start the week.

This article was written by Adam Button at Source