ECB December Hike Likely Last, But Inflation Risks Keep Door Ajar: Reuters Poll

ECB Set for December Hike, But Inflation Risks Linger

According to a Reuters poll, the European Central Bank is expected to raise interest rates for the final time in December, concluding a historic tightening cycle. However, the survey also indicates that inflation risks remain elevated, leaving the door open for an additional hike if necessary.

The ECB has been aggressively raising rates to combat soaring inflation, which has been driven by high energy costs and supply chain disruptions. The December meeting is widely anticipated to deliver a 50 basis point increase, bringing the deposit rate to 2.5%. But the poll suggests that the central bank may not be done yet, as inflation could prove more persistent than currently anticipated.

This cautious stance reflects the ECB's commitment to its 2% inflation target, even as economic growth slows. Traders are closely monitoring the situation, as any hint of further tightening could impact the euro and European bonds.

Drivers Behind the ECB's Cautious Approach

Sticky Core Inflation Keeps Pressure on the ECB

While headline inflation in the eurozone has eased from its peak, core inflation—which excludes volatile food and energy prices—remains stubbornly high. This suggests that underlying price pressures are still strong, and the ECB may need to maintain a restrictive policy for longer. The poll highlights that core inflation is not falling as quickly as hoped, which could force the ECB to extend its hiking cycle beyond December.

Additionally, wage growth in the eurozone is accelerating, adding to inflationary pressures. With unemployment at record lows, workers are demanding higher wages to keep up with the cost of living, which could lead to a wage-price spiral. The ECB is wary of this risk and may use further rate hikes to anchor inflation expectations.

Economic Slowdown vs. Inflation Fight

The eurozone economy is showing signs of strain from higher interest rates and energy costs. GDP growth has slowed, and a mild recession is possible. However, the ECB faces a delicate balancing act: raising rates too much could deepen the downturn, while doing too little could allow inflation to become entrenched. The poll suggests that the ECB will prioritize inflation fighting, even at the expense of growth, but the December hike may be the last if the economy deteriorates further.

Market participants are using tools like the VIX and yield curves to gauge recession risks. The ECB's decisions will be data-dependent, with upcoming inflation and GDP releases playing a crucial role.

Key Levels and Assets to Watch

Traders should keep an eye on EUR/USD, which has been volatile amid ECB and Federal Reserve policy divergence. A final hike in December could provide temporary support for the euro, but any dovish signals could weaken it. Additionally, German bund yields are a key indicator of market expectations for ECB policy; a rise in yields would suggest markets are pricing in more hikes.

Eurozone inflation data, due later this month, will be critical. A higher-than-expected reading could increase the probability of a hike in February, while a sharp decline might confirm December as the terminal rate. For those looking to trade these moves, a broker account with access to forex and fixed income products is essential.

What This Means for Traders

The ECB's potential final hike in December marks a pivot point for markets. If December is indeed the last hike, attention will shift to how long rates remain at their peak. The ECB has signaled that it will keep rates restrictive until inflation is brought under control, which could mean no rate cuts until late 2024. This scenario would support the euro in the medium term but could weigh on European equities.

However, the door remains open for further hikes, introducing uncertainty. Traders should monitor ECB President Christine Lagarde's press conference after the December meeting for any shift in tone. A hawkish surprise could trigger a rally in the euro and a sell-off in bonds, while a dovish tilt could have the opposite effect.

Risk management is crucial in this environment. Using stop-loss orders and position sizing based on volatility (such as ATR) can help navigate the uncertainty. For those new to trading, our classroom offers resources on understanding central bank policy and its market impact.

Ultimately, the ECB's decision will depend on incoming data, so staying informed and adaptable is key. Join our signal rooms to discuss trade ideas with other traders.