Economists at Société Générale discuss the European Central Bbank (ECB) interest rate decision and its implications for the EUR/USD pair. 

Hawkish 25 bps or dovish 50 bps?

“Our house call was for the ECB to hike by 50 bps, but the combo of below-forecast 1Q GDP growth (0.1% QoQ), a decline in core inflation to 5.6% in April (services up 0.1pp), tightening in ECB bank lending conditions and lower demand for loans tilted the scales in favour of a (hawkish) 25 bps.”

“Guidance in the statement and by President Lagarde that the tightening cycle is not over in theory should be conducive to the EUR/USD overcoming the April high of 1.1095 and having a go at 1.11 when the large option expiry rolls off and delta hedging flows subside.” 

“Upside for rates could be limited if investors opt for the safety of govies and receiving in swaps in the face of banking and debt ceiling jitters in the US.”