Euro on the Offensive after de Guindos, Wunsch Comments

• EUR surges higher
• Markets ramp up ECB hike bets
• Following de Gunindos, Wunsch comments
• Lift-off now seen in July
• With further hikes by year-end
• Taking ECB out of the slow lane

Above: File image of Luis de Guindos, Vice-President of the European Central Bank. Image copyright European Central Bank.

The Euro is registering a fresh advance on fresh indications the European Central Bank could raise interest rates as soon as July.

The ECB should be able to phase out asset purchases in July to pave the way for an interest-rate increase as early as that month, says ECB Vice President Luis de Guindos.

The de Guindos comments, made in an interview with Bloomberg, came a day after fellow ECB Governing Council member Martins Kazaks said a rate hike could come as soon as July.

ECB Governing Council member Pierre Wunsch also spoke Thursday, saying the ECB could lift policy rates above zero before the end of the year.

"Without any really bad news coming from that front (Ukraine), hiking by the end of this year to zero or slightly positive territory for me would be a no brainer," Wunsch said.

The incoming commentary looks to be an attempt by the ECB to prepare markets for 'lift-off', which is in turn raising European bond yields and offering support to Euro exchange rates.

"de Guindos' comments carry more weight as he is typically closer to the centre of the Governing Council," says a daily note from TD Securities. "Recent comments from ECB officials are keeping the door open for a hawkish shift at the June meeting."

The Pound to Euro exchange rate retraced below 1.20 in a half-percent move, "EUR/GBP rises to 0.8363 as drip-feed of hawkish ECB comments lift euro," says Robert Howard, a Reuters market analyst.

The Euro to Dollar exchange rate meanwhile trades nearly three-quarters of a percent higher on the day at 1.0920. (Set your FX rate alert here).

Above: GBP/EUR (top) and EUR/USD (bottom) at four-hour intervals.

de Guindos said it's already "crystal clear" upcoming ECB forecasts - due to be release in June - will show higher inflation and lower growth expectations.

But, he said the chance of a recession and stagflation in the Eurozone was unlikely and therefore a tightening in monetary policy could be considered.

"I see no reason why we should not discontinue our Asset Purchase Program in July... for the first rate hike we will have to see our projections, the different scenarios,” he said.

"From today’s perspective, July is possible and September, or later, is also possible. We will look at the data and only then decide," he added.

Money market pricing shows investors now expect a 75% chance of a 25 basis point hike in the ECB's Deposit Rate in July, 25 basis points of hikes likely to be delivered by October.

German two-year bond yields rallied and look set to rise by the most in six weeks, climbing nine basis points to 0.14%.

The ECB said in March it is committed to ending quantitative easing in the third quarter, but this pricing is clearly moving forward.

The dynamic of earlier and more rate hikes being priced in for 2022 - essentially a tightening in monetary policy - is on balance supportive of Euro exchange rates.

Indeed, the Euro had been hindered over recent months by the ECB's slow journey towards raising interest rates from record lows as other central banks raced to normalise interest rates.

Increased hike expectations will likely rise following the remarks of de Guindos and Kazaks, offering the Eurozone's single currency further support.

The comments make for a marked contrast with the tone the ECB struck when delivering its April policy update where they offered no hint that interest rate rises are imminent.

The ECB's April guidance was largely unchanged on March's update and therefore disappointed against rising expectations that policy makers in Frankfurt would lay further ground for a 2022 rate hike.

The Euro fell following the update.

"Inflation is naturally an ongoing concern, but the ECB did not signal an end to bond purchases and stated they would continue to buy assets even after they begin raising rates. The EUR moved lower suggesting that the ECB may be behind the curve," said Chris Wilgoss, Head of Global Markets Treasury, Crown Agents Bank.

The Kazaks and de Guindos comments will inevitably raise questions as to whether a rethink at the central bank is already under way.

Further developments of this nature would naturally offer the Euro support.