Key week for markets: Fed pause and ECB rate hike expected

On this occasion, who has the potential to surprise the markets is the Fedafter, during the last weeks, investors have been recalibrating their expectations of rate increases, going from discounting an increase of 25 basis points at this meeting, to forecasting a pause in this regard, as the organization already anticipated in its Last meeting in early May.

For the ECB, the markets are more clear that it will carry out a rate hike of 25 basis points before repeating this movement in July. At that point the cycle of rate hikes in Europe will end, if investor expectations are met.

What happened at the last Fed meeting

At the May meeting, Jerome Powell, Chairman of the Fed, took the first step that anticipates the end of the rate hike process in this cycle. The president changed his message, and stopped anticipating more hikes in the future, to point out that the Fed “will closely analyze the information and study its implications.” meeting by meeting, making it clear that the body “will be ready to adjust its position” if it deems it necessary.

He acknowledged that the Committee had decided to “pause” the raising process, and this is where the debate is at the moment: the Fed could raise rates again, since, after that meeting, there were several members of the organization who publicly recognized the need not to stop the increase in the price of money yet.

A priori, everything indicates that the Fed will stick to Powell’s message and wait for July to raise rates. At least that is what the markets expect, with interest rate futures in the United States anticipating a last move of 25 basis points by the institution, but already in July.

However, there is a possibility that the Fed will end up raising rates next week, if one takes into account the agency’s intention to analyze the data “meeting by meeting”, since the day before the meeting On Tuesday, the first US inflation data for the month of May will be released.

If there were an upward surprise in this sense (analysts polled by Bloomberg expect a CPI advance of 4.1%, well below the 4.9% of the previous month), it is more than probable that the body will be forced to raise the price of money again, to try to keep pushing inflation down.

And as for the ECB?

In Europe, the ECB started raising rates after the Fed and looks set to end the hike cycle late against its US counterpart as well. The markets are discounting that there are still two rate hikes in Europe, one at the June meeting and another in July, in both cases of 25 basis points.

A decision other than what is being priced has the potential to create volatility in equity and bond markets, so investors should keep a close eye on Thursday’s ECB meeting.