50 bp ECB hike might give euro a knee-jerk boost – BBH

Economists at BBH note that the US Dollar Index is pushing higher on Wednesday after having tested the 50% retracement objective of its June-July rally near 106.48 on Tuesday.

50 bp hike might give euro a knee-jerk boost

"Despite reports of a possible 50 basis point (bp) move by the ECB tomorrow, the euro rally ran out of steam near 1.0275.  We see four potential outcomes tomorrow, most of them euro-negative."

"Best case outcome for the euro would be a 50 bp hike and the announcement of an aggressive anti-crisis tool, while the worst case would be 25 bp and further delays to the tool."

"In between would be a 50 bp hike and no tool or a 25 bp hike and an aggressive anti-crisis tool.  We think the best case outcome is highly unlikely (15%), as is a 25 bp hike and aggressive anti-crisis tool (15%).  As such, we are left with the worst-case outcome (35%) and 50 bp hike with no tool (35%) as the most likely outcomes."

"While a 50 bp hike might give the euro a knee-jerk boost, the fact that the ECB cannot come up with a credible anti-crisis tool should eventually weigh on the single currency. "