Why the euro is struggling despite higher rate hike odds

<p>I'm fairly certain that the leak from the ECB regarding higher 2024 inflation forecasts — these are undoubtedly the all-important staff forecasts — is a message to the market that they're planning on hiking. If not it's a bizarre communications strategy from the ECB.</p><p>What's upsetting is that the were was heavy buying of rate derivatives before the leak and the euro was also curiously strong on Monday. So I can't rule out that some of the price action today is mixed up in whatever is happening behind the scenes. </p><p>In any case, hike odds now sit at 63%, down from a high of 75% today as the market remains skeptical that this truly is a leak. I think it is but the case for buying the euro still isn't great. I <a href="https://www.forexlive.com/news/will-there-be-anything-left-of-the-german-economy-20230912/" target="_blank" rel="follow">wrote </a>yesterday about the dire fundamentals of the Germany economy and today we learned that the German government is <a href="https://www.google.com/url?sa=t&amp;rct=j&amp;q=&amp;esrc=s&amp;source=web&amp;cd=&amp;cad=rja&amp;uact=8&amp;ved=2ahUKEwjHuafRo6iBAxXjATQIHTSyClIQFnoECA0QAQ&amp;url=https%3A%2F%2Fwww.forexlive.com%2Fnews%2Fgerman-government-to-downgrade-gdp-forecast-for-the-year-sees-contraction-of-03-20230913%2F&amp;usg=AOvVaw1pUJmksAg_mQnWza943zMa&amp;opi=89978449" target="_blank" rel="follow">downgrading </a>its GDP forecast.</p><p>The market generally likes higher rates but it doesn't reward currencies when it thinks there has been a policy mistake. Raising rates now in Europe as the economy is clearly slowing argues for a faster pace of rate cuts later. </p><p>Ultimately, I think the euro will pop initially on the rate hike decision but I don't think it will last long, particularly if it's a hike that includes strong language indicating that the ECB is moving to the sidelines.</p>

This article was written by Adam Button at www.forexlive.com.