I'm fairly certain that the leak from the ECB regarding higher 2024 inflation forecasts -- these are undoubtedly the all-important staff forecasts -- is a message to the market that they're planning on hiking. If not it's a bizarre communications strategy from the ECB.
What's upsetting is that the were was heavy buying of rate derivatives before the leak and the euro was also curiously strong on Monday. So I can't rule out that some of the price action today is mixed up in whatever is happening behind the scenes.
In any case, hike odds now sit at 63%, down from a high of 75% today as the market remains skeptical that this truly is a leak. I think it is but the case for buying the euro still isn't great. I wrote yesterday about the dire fundamentals of the Germany economy and today we learned that the German government is downgrading its GDP forecast.
The market generally likes higher rates but it doesn't reward currencies when it thinks there has been a policy mistake. Raising rates now in Europe as the economy is clearly slowing argues for a faster pace of rate cuts later.
Ultimately, I think the euro will pop initially on the rate hike decision but I don't think it will last long, particularly if it's a hike that includes strong language indicating that the ECB is moving to the sidelines.
