ECB Preview: Three scenarios and their implications for EUR/USD – TDS

Economists at TD Securities discuss the European Central Bank (ECB) interest rate decision and their implications for the EUR/USD pair.

Hawkish (5%): 25 bps hike & bias to Sep hike

No material change to the decision vs. June. 25 bps hike and no change to balance sheet policy. President Lagarde suggests that the base case should be a hike in September and that the data has to prove otherwise. EUR/USD +0.25%.

Base Case (70%): 25 bps hike & cautious language

No material change to the decision vs. June. 25 bps hike and no change to balance sheet policy. Lagarde remains ambiguous about September – if data supports it, then the Governing Council will hike. This isn't about surprises to the data vs the June projections, but a broader statement that puts the onus on macro-dynamics to justify a hike. Lagarde says that policy moves beyond September are purely a function of data. EUR/USD -0.15%.

Dovish (25%): 25 bps hike & high bar to further hikes

No material change to the decision vs. June. 25 bps hike and no change to balance sheet policy. Lagarde makes it clear that the data has to surprise to the upside (vs ECB June projections) to see a hike in September. In other words, while it's not impossible, there's a relatively high bar to it. She doesn't say that the ECB has reached its terminal rate, but that's the implication. EUR/USD -0.75%.