EUR: We look for ECB September hike
Eurozone data has been consistently weak over the past month but the deterioration is probably not yet severe enough for the ECB to switch tracks. Trichet sounded surprisingly hawkish during last week's testimony to the European parliament and political protestations have once again fallen on deaf ears. In this backdrop, our economists agree that although the risks to growth remain to the downside, Q2 GDP should still post a positive 0.1% q/q. Nevertheless, we expect the ECB to deliver a second rate hike this year, probably in September. Our economists believe that the ECB made it very clear that inflation expectations and wage rounds are a risk for inflation, and that it wants to counter these effects. The July hike should have been enough to achieve this goal, but given the forthcoming increase in inflation, we believe they will hike again before turning to a neutral stance next year, where 75bp in cuts are expected. In the week ahead, CPI and the German ZEW survey are due and a number of ECB officials are scheduled to speak. Hawkish ECB comments and elevated inflation should support EURUSD.