Senior Market Analyst
Market pricing put the odds of an ECB December rate hike at around 84% both heading into and coming out of a European Central Bank meeting that left interest rates unchanged. The hold followed two rate increases since the start of the Iran war, and the European Central Bank's statement set the inflation risk from higher energy prices against tightening financial conditions. Steady pricing through the meeting shows the policy pause did not change how markets view the December decision.
Fiona Cincotta, StoneX Senior Market Analyst, covers currencies, equities and commodities, with a focus on UK and European macro themes and central bank policy. That coverage gives insight into what is driving the European Central Bank's December decision, from energy prices and eurozone bond yields to the euro.
The European Central Bank left interest rates unchanged because higher energy prices have not yet spread into core inflation or wages across the eurozone. Headline eurozone inflation stands at 3.8%, yet core inflation, which strips out volatile items such as food and fuel, remained stable. "Wages are still not yet rising, and that does give the suggestion that higher energy prices are not yet showing up elsewhere in the economy, which is another reason for the ECB to leave interest rates unchanged," Cincotta says. Tightening financial conditions, which stem from higher bond yields linked to the political and fiscal crisis in France, added a second reason for caution. As a result, the hold balances an energy-driven inflation risk against borrowing costs that are already rising.
ECB President Christine Lagarde kept a December rate hike on the table while promising to step in and stabilize European bond markets if weaker economies face financial panic. Lagarde also confirmed the importance of fiscal control within eurozone member states. EUR/USD fell after the initial statement but recovered through the press conference, while December hike pricing held near 84%. The bond pledge, Cincotta says, is "what really helped to boost investor confidence and has helped strengthen the euro". Consequently, the pledge shifted sentiment toward the euro without changing the bearish trend on the EUR/USD chart.
The signals behind an ECB December rate hike surface in eurozone wages, core inflation, energy prices and bond yields. Rising wages or core inflation would show higher energy costs spreading through the wider eurozone economy. Eurozone bond yields, particularly those tied to the fiscal situation in France, show how far financial conditions are tightening. Market pricing for a December move shows how traders weigh these signals together.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Fiona Cincotta, StoneX Senior Market Analyst
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Market pricing for an ECB December rate hike held steady through a meeting that left interest rates unchanged. Stable core inflation, wages that are not yet rising and a bond market pledge from Lagarde explain why the door to another move stays open.
France's fiscal and political crisis has driven French bond yields to their highest level in 24 years, raising borrowing costs across the eurozone. The selloff is tightening financial conditions on the European Central Bank's behalf just as energy prices push inflation higher.
Markets are priced for tightening from both the Reserve Bank of Australia and the Reserve Bank of New Zealand, yet each central bank faces a different test. Guidance will decide the Kiwi's reaction while the trimmed mean inflation print decides the RBA, and the gap between the two flows straight into AUD/NZD.
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