• ECB encounters one of the challenging decisions in its financial history.
• Escalated inflation pressures ECB.
• Euro remains bullish despite ECB’s decision.

Next week’s (Thursday) European Central Bank meeting is among the most stimulating central bank conferences in 2022. Analysts expect ECB to maintain the primary financing range unchanged at zero, where it has been for years.

On the other side, inflation remains elevated, surpassing ECB’s target. The previous CPI data indicated inflation hit 8.1% Y/Y in May, whereas interest rates stayed zero. Furthermore, the deposit facility rate is within the negative territory.

Does this mean the highest disconnect in history as far as inflation and monetary policy are concerned? Perhaps yes! Nevertheless, the European Central Bank had a challenging time setting the fiscal policy. First and foremost, the global supply chain issues persist, despite COVID-driven restrictions ending long ago in developed nations, including Europe.

Secondly, the Ukraine-Russia conflict since late February has translated to further surges in the prices of services and goods. Since the geopolitical tension affected economic recovery following the COVID shock, ECB hesitates about normalizing monetary policy.

Will the European Central Bank hike interest rates during the upcoming Thursday meeting? Financial expect trust it won’t. Nevertheless, the current market cycle remains different on several levels that individuals can’t ignore any outcome.

Meanwhile, the euro stays fundamentally bullish regardless of the upcoming decision by ECB. Nevertheless, here are the two possible cases for Thursday’s outcome, both pointing to hawkishness for the euro.

ECB Not Raising Rates in June

Let us presume ECB leaves interest rates unchanged on Thursday. Though dovish, the stance related to the decision might confirm a 50 basis point rate increase in July. Therefore, the decision might be hawkish for the euro, regardless of ECB not tampering with rates.

ECB Raising Rates in June

Though analysts discard interest rates move, beware ECB encounters a momentous decision. The common currency has never seen escalated inflation matching the current condition.

Meanwhile, the central bank delaying rate hikes, even by six weeks only, could injure consumer confidence plus its credibility. Other leading banks have hiked rates multiple times; why not ECB? Moreover, a surprise rate increase would see the euro on a steady foot.