ECB Forecast: A 50 basis point rate hike could have a negative effect on the EUR – Commerzbank

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What will the ECB decide today? And what will be the reaction of the currency market? We cannot be sure that the markets’ reaction to the ECB’s decision will be “normal”, report economists from commerzbank.

How will the euro react in case of a rise of 50 basis points, and with one of 25 basis points?

“For a 50 basis point rate hike to have a positive effect for the euro again today, the market has to believe that such a hike would be appropriate.”

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“If currency traders view the situation in the European financial system as fragile, they might view a 50 bp hike as a mistake and conclude that doing so would require much stronger or earlier ECB rate cuts. In In that case, a 50 basis point rate step would have a negative effect on the euro. It is not certain that the currency market thinks so, perhaps not even very likely.”

“I imagine that the Euro will react positively if we only see an increase of 25 basis points. The necessary condition for that decision on rates to be positive for the Euro would be that the ECB is able to convince the market that, if the financial system really calms down, the “missing” 25 basis points will be made up. That means it depends on how convincing Lagarde is today.”

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Source: Fx Street

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