ECB Governing Council member Ante Zigman said the probability of another rate hike in December is high. He made the remarks in comments for Bloomberg. The Governing Council itself decides on the eurozone rate.
What the key rate is. It is the price of money that the central bank sets for the entire economy. A hike makes loans more expensive and usually slows inflation.
Why this matters to a trader. The rate moves the euro exchange rate, and therefore the EUR/USD, EUR/GBP, EUR/JPY pairs. The rate itself barely reacted to the words: EUR/USD held around 1.1220, slightly below the day's levels.
What exactly did Zigman say?
The comments hit the feed on November 5 at around 14:30 Moscow time.
- "Fairly high" - that is how Zigman described the probability of a rate hike in December.
- Inflation continued to rise in October, he noted.
- "Too early to say how much more tightening is needed" - a caveat right after the forecast.
The takeaway from the caveat. How many hikes will be needed beyond the December one has not yet been decided at the ECB.
Why does this matter for currencies?
For the forex market, such phrases work as a claim on the future. The higher a central bank's rate, the more expensive its currency usually is. Capital flows to where the yield is higher.
While the market considered the hiking cycle over, the euro lived by one logic. If the rhetoric of Council members shifts toward another step up, the entire curve of expectations has to be recalculated.
Key point: there was no reaction in the euro to the words themselves. The market is waiting for confirmation from other Council members and from eurozone inflation data.
What does this mean for a trader?
Until the December meeting, any speech by ECB representatives becomes a potential trigger. Three pairs are immediately in the crosshairs.
- EUR/USD. The main pair, where rate expectations are repriced fastest.
- EUR/GBP. Here ECB rhetoric works against the pound.
- EUR/JPY. The rate differential is especially sensitive for this pair.
It is convenient to keep the dates of speeches and eurozone inflation releases in the economic calendar.
What happens next?
Two scenarios for what will happen to volatility:
- Scenario A. Zigman's colleagues on the Council repeat the same thesis, and inflation statistics support it. The move in the euro stretches over weeks and intensifies with each statement.
- Scenario B. The other Council members sound softer, and the market dismisses the words as a private opinion. EUR/USD stays in a narrow range right up to the meeting, and the entire volume of movement comes in a single day.
The euro moves, but your account has pennies?
ECB meetings are worked out not by guessing but by volume. The same 70-pip move in EUR/USD on a deposit of a couple thousand gives you enough for dinner. On an account of one hundred thousand it is a full month's result, and the stop-loss costs the same there. In prop trading, the notional is provided by the company: you pay to have your discipline tested, you keep your loss limits, and then you work with its capital for an agreed share of the profit. It makes more sense to understand the mechanics now, not on the evening of the December meeting.