European Central Bank (ECB) Governing Council member Klaas Knot told on Tuesday that a 50 basis points rate hike should not be excluded. EUR/USD jumped with the initial reaction to these comments, economists at Commerzbank report.
Knot’s comments support the euro
“Klaas Knot yesterday introduced the possibility of 50bp steps. By making this comment Knot opens up a new line of attack for the ECB hawks. The publication of each set of high inflation data would strengthen this view and at least make such a step seem marginally more likely.”
“The FX market is not so interested in knowing how much a central bank might hike interest rates at the next meeting or the next one. What is instead decisive for the value of a currency is whether a central bank reacts sensitively to inflation.”
“The ECB initially assumed inflation was ‘transitional’ and did nothing. And now it is still waiting due to regulative considerations. In view of rapidly accelerating inflation that constitutes weak reactivity. Knot’s comments clearly differ from that. And that is why the euro was able to benefit from these comments even if nobody saw a reason to raise the ECB’s projections for the immediate future as a result of them.”