Euro bulls remain on the sideline ahead of ECB jumbo rate hike

Following a rebound on Wall Street, European markets are expected to open higher on Thursday. Today's focus falls on the European Central Bank, which is due to announce its latest monetary policy moves. A series of rate hikes are expected to be frontloaded, and growth in the region is likely to be sacrificed due to the rising cost of living. 

Considering that inflation in the eurozone is expected to reach at least 10% in the coming months, a 75 basis point rate hike on Thursday is possible.

There is also a policy dilemma embedded in the decision. A sharp increase in inflation and a significant slowdown in economic growth is likely to be reflected in the latest ECB forecasts.

It is almost certain that the sky-high energy prices will sap consumers' purchasing power and almost certainly put the EU into a recession, which may be worsened by an aggressive ECB, mainly when borrowing costs are on the rise for governments trying to help those most in need.

Moreover, a significant hike after a decade of ultra-low rates will go against the ECB's guidance to gradualism. This is why several policymakers, such as Fabio Panetta, the head of the Italian central bank, and Yannis Stournaras, the head of Greece's central bank, have called for a smaller rate hike.

In addition, central banks are powerless to counter inflation driven by supply-side disruptions, and raising interest rates now will have a detrimental impact on the economy years later when inflation is Already abating.

Chart of the day

In Japan, the economy grew by 3.5% annually instead of the 2.9% expected and 2.2% previously. The quarterly data was also higher at 0.9% compared to expectations of 0.7% and the prior release of 0.5%.

The EUR/JPY pair has bounced back quickly after hitting 144.32. It swung to volatility after the Japanese Cabinet Office announced better-than-expected economic data. Market participants are expected to remain bullish on the pair on a broader scale as they believe that the policy divergence between the European Central Bank and the Bank of Japan will continue to escalate.

Given that, EUR/JPY might be able to continue climbing over the crucial 144.42, which will put the eight-year highs around 149.50 in the spotlight.

Events of the day

Investors will also closely follow Jerome Powell's Thursday speech as markets prepare for another 75-basis-point rate hike later this month. Additionally, traders will be paying attention to the ECB press conference.

Initial jobless claims for the week will be released in the US, which is expected to rise from 232K to 240K.

Because other central banks are unlikely to raise rates as aggressively as the markets are anticipating, the US dollar has room to rise even further. This is driven by rate differentials and a hawkish Federal Reserve.