Fine Line For ECB 

Today’s ECB meeting comes at a highly inopportune time for the bank. The latest inflation data out of the eurozone certainly highlights the need for the bank to press ahead with a further .5% hike as signalled. However, recent market instability and fresh concerns around banking sector liquidity make the prospect of a large hike a daunting one with the risk that such a move further unseats market confidence. As such, a .5% hike from the bank today might well send EUR over financial stability concerns.

Smaller Hike in Focus 

If the ECB opts for a smaller hike, and a less hawkish outlook, this might well have a less detrimental impact on banking stocks. However, the broader issue remains inflation. With inflation showing stickiness around current high levels, the bank has not yet achieved its goal of taming upward price pressures. In this scenario, EUR is likely to fall also.

Tough Call 

Clearly, this is a very tough call for the ECB as it tries to navigate achieving its inflation target while balancing financial stability risks. A lower hike looks to be the more reasonable outcome today with focus on the bank’s forward guidance which is likely to centre around reaffirming its commitment to tightening though likely at a slower pace.

Technical Views

EURUSD

Ahead of the ECB meeting, EURUSD is sitting on a ledge of support along the 1.0515 level, underpinned by the bull channel lows. While still within the bull channel, the outlook remains bullish. However, with price action into the top suggesting a head and shoulders pattern, downside risks are noted. A break of 1.0515 today will open the way for 1.0364 next and the bigger target at 1.0088.