The euro was the top performing G10 currency on Wednesday. Regarding the European Central Bank (ECB) meeting, the crucial aspect for the markets is how much guidance President Lagarde is willing to give in relation to the size of the rate hike in July. Economists at MUFG expect the common currency to strengthen unless a 50 bps rate hike in July is completely discarded.

EUR to continue recovering lost ground

“President Lagarde is unlikely to explicitly indicate 50 bps is coming but will Lagarde be in a position to explicitly exclude it? We doubt it and if that is the case, the rates market may well move to fully price 50bps. That implies further upside scope for market rates and the euro.” 

“We expect Lagarde to emphasise the scope for reinvestments to be undertaken flexibly implying the willingness to shift reinvestments from say Germany to Italy. If a strong commitment is expressed on that, it would likely reinforce expectations of more aggressive rate hikes over the short-term.”

“The outperformance of the euro yesterday may be an indication of direction today following the ECB meeting.”

See – ECB Preview: Forecasts from eight major banks, ready for lift-off