The market failed to appreciate just how large of a shift the ECB made last week in Lagarde and Schnable's comments.
Today though, the ECB's Knot may have jolted it awake by putting a 50 bps hike on the table for July. The euro is up 115 pips today to 1.0547, offering some relief from the spectre of parity.
Deutsche Bank writes that the move might have been made to support the currency.
"It has been clear for a while that the ECB are not happy with the FX markets and teh rhetoric of endorsing hikes from July onwards has had minimal response in spot. Today, with Knot opening that door, we hve seen the currency respond," DB writes.
Economists at Deutsche Bank see 50 basis point hikes in July and September, noting that Villeroy has been pointing to 1-2% as the range of neutral and they want to get there.
They highlight the next round of CPI numbers as pivotal and expect a lively 25 vs 50 bps debate to develop.
There's plenty of skepticism around a more-hawkish ECB given that they've struggle to hike for a decade but I sense that there's commitment from central banks globally to tame inflation and that the ECB will do its part. That sets up a larrge bounce in the euro.
