Traders are uncertain about the upcoming ECB interest rate decision as the economy underperforms.
DAX: Daily Chart
The Dax index of German shares found support at the 15,573 level and will look for a follow-through.
The ECB downgraded its growth forecasts for the Euro Area, with Germany noted as a key risk. German GDP for 2023 has now been downgraded to -0.4%. Europe’s largest economy is contracting, with the only positive being a drop in inflation.
BofA Global Research said last week that it expects the European Central Bank (ECB) to hike all three policy rates by 25 basis points at the Sept. 14 meeting. The brokerage expects “very little” in the outlook for the following meetings but said the bias would be towards pausing rate hikes.
While convictions for its upcoming meeting are “not strong”, in the absence of large surprises, if the ECB does not hike in September, “July would be the last hike of this cycle”, BofA Global Research said.
The European stock indices could benefit if the bank does not increase borrowing rates this week.
France’s Francois Villeroy de Galhau hinted that another hike could still come at a later date and argued the slowdown is not a recession, so the ECB needed to continue its fight with inflation.
“Our options are open at this council as well as at the following meetings,” he told reporters. “We are very close to the peak in our interest rates. We are, however, still far from the point where we could consider cutting them.
Slovakia’s Peter Kazimir took a tougher stance, saying another hike was still needed to tame inflation. He added that the ECB could delay a rate rise until an autumn meeting or move this week.
“The second option seems preferable and reasonable to me,” Mr. Kazimir said. “It is to deliver another 25 basis points next week and take a breather thereafter.
Dutch central bank governor Klaas Knot has also wanted to see continued efforts against inflation and said investors may be underestimating the chances of a move, with the decision being a close call.
“I continue to think that hitting our inflation target of 2 percent at the end of 2025 is the bare minimum we have to deliver,” Mr. Knot told Bloomberg.
The Dax could rally this week if the ECB decides to pause its increase in borrowing costs, while another hike could see stocks suffer.
