In its outlook, ING expects the ECB to hike rates by 25 basis points tomorrow and leave the door open for a rate hike of 50 basis points in September. Here is their cradle sheet going into tomorrow’s political decision:
As for the euro, they see that:
“There is no doubt that the ECB is unhappy with the recent weakness of the euro – not only against the dollar, but on a trade-weighted basis. The recent hawkish surprises from the ECB, however, have failed to offer lasting support for the euro, and we suspect that a larger-than-expected move (a 50bp rate hike) or more hawkish-than-expected forward-looking language may not generate enough momentum for the euro. ‘euro.
“This is notably due to the growing downside risks in the Eurozone, mainly related to the threat of a gas supply crisis in the coming months (or during the winter) and more recently to the return of Italy in political uncertainty.
“Our base-case scenario for EUR/USD is that it can retest parity this week – with the ECB potentially a trigger – and that it could only return to levels above 1.0300 once the dollar will have lost some momentum (which would require some stabilization in risk sentiment) and markets are feeling quite comfortable with the extent of the economic slowdown in European assets.”