Listening to ECB President Christine Lagarde, one gets the impression that a further ECB interest rate hike as early as October is highly unlikely. Of course, Lagarde is not ruling anything out. And why should she? She has nothing to gain from limiting her options. Observers who still lament the lack of forward guidance have not understood what is different today from the days when interest rates were stuck at the lower bound, Commerzbank’s FX Head of FX and Commodity Research Ulrich Leuchtmann notes.

Considerable gap between the current EUR/USD level and 1.14

“Yesterday's communication did sound very much like a pause in October. The ECB's projection for HICP inflation was not changed; the market panic of falling inflation expectations is not shared by Europe's monetary authorities. On the contrary, the forecast for core inflation in 2024 and 2025, which is particularly relevant for the inflation outlook, was even revised slightly upwards. The ECB could not have done more to refute the recent changes in market expectations.”

“Those who believe in moderate deflation rather than in the inflation collapse that the market is currently assuming will have to conclude that the ECB interest rate cuts will not be as rapid or pronounced as the market currently assumes. From this perspective, the fact that the ECB expectations did not change significantly yesterday merely shows that there is still a need for adjustment. This applies to inflation and ECB expectations as well as to EUR exchange rates.”