ECB's Schnabel: Rates Must Rise Further as Eurozone Economy Proves Resilient

ECB's Schnabel Calls for More Hikes as Eurozone Growth Holds Up

European Central Bank (ECB) board member Isabel Schnabel said on Tuesday that interest rates must rise further, pointing to a resilient economy that keeps inflation pressures elevated. Her remarks, reported by Reuters, underscore the central bank's commitment to taming price growth even as the bloc faces headwinds.

Schnabel noted that the euro area economy has shown surprising strength, which means the ECB's restrictive policy has not yet fully dampened demand. This resilience, she argued, justifies additional tightening to ensure inflation returns to the 2% target in a timely manner.

The comments come ahead of the ECB's next policy meeting, where markets are pricing in a 25-basis-point hike. However, Schnabel's hawkish tone suggests that further moves may follow if economic data remain robust.

What's Driving the ECB's Hawkish Stance?

Persistent Core Inflation and Wage Pressures

Core inflation, which excludes volatile food and energy prices, has been slow to decline, hovering near record highs. Schnabel emphasized that the pass-through of higher energy costs to broader prices and strong wage growth are keeping underlying price pressures sticky.

With unemployment at historic lows, workers are demanding higher pay, which could perpetuate inflation. The ECB's own staff projections show inflation staying above target through 2025, reinforcing the need for a higher peak in rates.

Economic Resilience Defies Recession Fears

Despite earlier predictions of a recession, the euro zone has managed to avoid a severe downturn. The services sector remains buoyant, and manufacturing is stabilizing, leading to a more favorable growth outlook. This resilience gives the ECB room to continue tightening without triggering an immediate economic collapse.

Schnabel's remarks echo those of other policymakers, including President Christine Lagarde, who have stressed that the fight against inflation is not over. The central bank's deposit rate currently stands at 3.5%, with markets expecting it to peak near 4% later this year.

Key Levels and Assets to Watch for Traders

For forex traders, the euro's trajectory will hinge on how much further the ECB goes. If the central bank delivers more hikes than currently priced, EUR/USD could break above recent ranges. Conversely, any dovish surprise would likely pressure the pair. Keep an eye on the live EUR/USD price for real-time moves.

Bond markets are also sensitive to ECB policy. The German 10-year Bund yield has been climbing in anticipation of higher rates, and a sustained rise could spill over into global yields. Traders using technical indicators like moving averages and RSI on Bund futures can gauge momentum shifts.

What This Means for Traders and How to Position

For traders, the key takeaway is that the ECB is firmly in hawkish mode, which supports the euro in the medium term. However, the risk of over-tightening looms, and any signs of economic weakness could quickly reverse expectations. The VNIX signal rooms are buzzing with ideas on how to play the ECB's next move.

One approach is to watch inflation data closely. If core CPI surprises to the upside, expect the ECB to accelerate its tightening, boosting the euro. Conversely, a sharp drop in inflation could lead to a dovish pivot, weakening the currency. Understanding central bank communication is crucial for interpreting these shifts.

Additionally, traders should consider the broader global context. The Fed is nearing the end of its tightening cycle, and a pause in the US could make the euro more attractive relative to the dollar. However, if the US economy remains strong, the dollar could regain its footing, capping EUR/USD gains. Finding a reliable broker with tight spreads is essential for executing these trades efficiently.