MUFG: The EUR - FJElite

The main event risk today will be the ECB's latest policy meeting. As highlighted above, yields in the euro-zone have risen to fresh year-to-date highs ahead of today's meeting highlighting in part that market participants are expecting hawkish policy guidance from the ECB today. The European rate market has moved to price in 2-3 further ECB hikes in the year ahead. Another hike as soon as the following policy meeting in September is almost fully priced in. It fits with our own forecast for one final hike in September, although we acknowledge that the risk of an additional hike later this year would is increasing if higher energy prices are sustained during the second half of this year. We see little scope today for President Lagarde to push back strongly against market expectations for multiple rate hikes given inflation risk are increasing. Higher energy prices will add to downside risks for growth in the euro-zone as well. Like in the US, the euro-zone economy has held up better than expected so far to the energy price shock providing some reassurance. We would still expect the euro to weaken more in response to a bigger energy price shock posing downside risk to our forecasts. However, rising euro-zone yields are helping to provide support in the near-term.