ECB Pricing Unwinds Most Of Knot-Inspired Uptick

Comments from ECB Governing Council member Knot provided some upward impetus for ECB pricing, as he stressed that September’s decision will be a “close call,” warning that markets may be underestimating the odds of a hike next week.

• Still, additional comments provided by the hawk were a little more guarded, as he noted that a further hike is a possibility, not a certainty, alongside a reluctance to revisit guidance re: PEPP reinvestments.
• On the economic outlook, Knot noted that the Bank’s refreshed inflation outlook will not differ much from the existing forecast track, while also cautioning against too much pessimism re: the economy.
• Liquid contracts on the ECB-dated OIS strip now print flat to 1bp firmer on the session, after pulling back from initial knee-jerk highs on Knot’s non-committal tones.
• Around 8bp of tightening is now showing for next week’s decision, with terminal deposit rate pricing holding just above 3.90%.
• Elsewhere, Governing Council member Villeroy pointed to “open” options re: next week’s meeting, while stressing the duration of interest rates holding at peak levels is more important than the absolute peak level.