Traders believe the European Central Bank’s room to raise interest rates has shrunk before the start

Investors They fear that the European Central Bank is running out of time to raise interest rates before it even begins.

To combat the fastest inflation since the introduction of the euro, Officials plan to start a “continuous” cycle of highs Thursday with a quarter point high, The first since 2011, with the stimulus years finally coming to an end.

but while As traders take note of a possible cut in Russian energy supplies to Europe, a new political storm in Italy and an economy teetering on the brink of recession, expectations about how far the European Central Bank could go are already fading away.. Bearish bets on the Euro are approaching levels seen when the pandemic hit in 2020.

According to Nomura Holdings Inc. and BCA Research Inc. , The effect of stopping gas flows and a slower pace of risk tightening drag the common currency to a low of $0.9. In this scenario, strategists at UBS Group AG see 10-year bond yields recovering to 0% by the end of the year from 1.1% today, ending their short entry into positive territory.

The rate movement planned by the European Central Bank for the next week will only bring down the deposit rate to minus 0.25%. For Dominic Bunning, Senior Currency Analyst at HSBC Holdings Plc, lMonetary policy makers may find it difficult to make significant progress in the coming months.

“You might think they could hit 0.5% early next year, but the window is closing very quickly.“Europe is slowing down no matter what the European Central Bank does,” he said.

Traders are pricing in 155 basis points to tighten by the end of the year, from a high of more than 190 basis points in mid-June.

Although some people within the ECB have called for more aggressive action than half a point to start, it is considered unlikely., because it goes against the guidelines and could compromise credibility. A rally of this magnitude remains the base case for September, and traders are focused on what happens next.

The key to the ECB’s ability to move forward will be a new tool to allay unwarranted fears in government bond markets as borrowing costs soar. Work intensified on support last month, Which is expected to appear at next week’s meeting, after a jump in yields in debt-laden Italy, sparking memories of the sovereign debt crisis in the eurozone.

“What the market wants is a tangible statement of the instrument“, He said Gareth HillPortfolio Manager at Royal London Asset Management. “If the ECB does not provide enough details, there may be fear“.

The margin for disappointment is highAnd Italian Prime Minister Mario Draghi’s offer to resign makes sentiment even more sensitive. The difference between Germany’s 10-year debt and Germany’s is now about 215 basis points, highest in a month.

Strategists at Commerzbank AG said in a report to clients that failure to offer a “comprehensive and credible” instrument would widen that gap. They believe the spread will again reach its maximum for this year, 240 basis points.

Investors are equally concerned about the energy outlook. The continent’s economic fortunes depend on the resumption of natural gas supplies from Russia after maintenance of a major gas pipeline ended on Thursday.

Eurozone growth forecasts are already being lowered. The European Commission said this week that the region now faces a “much slower” expansion and a larger and longer-term cost-of-living shock than it did just two months ago.

The euro reflects this bleak picture, and its decline complicates the European Central Bank’s fight against inflation which is already four times above the 2% target. The The Governor of the Bank of France, Francois Villeroy de Gallo, said that those responsible for monetary policy are aware of the decline due to its impact on prices.

The overall picture is a toxic mix for the European Central Bank, which, despite initiating rate hikes four months after the Fed, may end up stalling soon, according to Alex Brazier, deputy director of the BlackRock Investment Institute.

“We expect the energy shock to affect demand in the eurozone much more than it does in the United States,” he said. Bloomberg TV. “The European Central Bank will turn pivot at some point and abandon its determination to raise interest rates this year to end up living with slightly more inflation.”

next week

• Thursday’s European Central Bank monetary policy decision dominates the calendar with the first increase since 2011 expected to be a quarter point. Money markets are also betting on a 20% chance of raising half a point.
• Details of a new anti-fragmentation tool are also expected to be revealed to deal with any fallout from higher borrowing costs. Note the new expected publication time of 1:15pm. London, followed by President Christine Lagarde’s press conference 30 minutes later
• Bond sales from Germany, France, Spain and Belgium are expected to be around 24 billion euros ($24.2 billion), according to Commerzbank AG. The UK will sell 5.5 billion pounds ($6.5 billion) of bonds due in 2025 and 2039.
• The Eurozone, Germany and UK manufacturing and services PMI numbers for July will provide the latest clues on the respective economies. The UK is also to publish retail sales and inflation figures for June.