ING expects the European Central Bank (ECB) to raise its deposit rate by 25 basis points at today's meeting in each of the four scenarios outlined in a framework published ahead of the decision. With the rate move viewed as largely settled, attention is likely to center on the accompanying language, updated projections and the tone of future policy guidance.

The ECB's deposit rate currently stands at 2.25%, so a 25 basis point increase today would take it to 2.50%. The central bank has maintained a data-dependent, meeting-by-meeting approach ahead of the announcement. ING's framework identifies potential outcomes based on inflation risks, growth prospects and the direction of interest-rate guidance.

The range between ING's most dovish and most hawkish scenarios indicates the possibility of two-way market moves around the press conference. The bank places EUR/USD between 1.150 and 1.168 across the scenarios, while the 10-year Bund yield ranges from 3.30% to 3.45%. The euro and Bund yield are currently near the middle of those ranges, at 1.161 and 3.40%, respectively. Because the hike itself is assumed in every scenario, that spread reflects the uncertainty around the message rather than the decision.

ING's current assessment is that inflation risks are tilted to the upside because of higher energy prices and the possibility of second-round effects. Growth risks, however, remain skewed to the downside in the near term because of the war in the Middle East. The scenarios are built around that split between upward inflation pressure and downward growth pressure.

The bank's own base case is a dovish hike. Under that scenario, inflation projections would be revised slightly higher without materially changing the overall balance of risks. Growth projections would improve even as downside risks remained, while policymakers would offer only limited pushback against market pricing and keep their options open.

ING associates this scenario with EUR/USD near 1.157 and a 10-year Bund yield around 3.35%.

At the most dovish end of the framework, the ECB would deliver the expected rate increase but signal a prolonged pause and express concern about bond-market conditions. ING associates that outcome with EUR/USD near 1.150 and a 10-year Bund yield around 3.30%.

The neutral scenario would involve the ECB acknowledging that the latest escalation in the region is creating additional upside risk for inflation, while viewing growth risks as more balanced after improved projections. Policymakers would also signal that another rate increase in the coming months remains possible. ING places EUR/USD around 1.163 and the 10-year Bund yield near 3.40% in that scenario, close to current levels.

In the most hawkish scenario, the ECB would acknowledge that the inflation impact may be larger than initially anticipated and could require continued policy action. This outcome would also include a larger-than-expected upward revision to growth projections, along with clear indications of another rate increase in October and potentially beyond. ING assigns EUR/USD a level near 1.168 and a 10-year Bund yield around 3.45% under that scenario.

Because the euro and Bund yield are currently closest to the levels in ING's neutral case, the bank's framework indicates that markets may already be positioned for a firmer tone alongside today's hike rather than a dovish message. ING said this could leave room for a larger reaction if the ECB's guidance moves closer to either extreme of its range. The practical test will be which of the four scenarios the ECB's statement and press conference language most closely tracks.

Earlier coverage: ECB preview: A rate hike expected as markets focus on Lagarde, inflation and future policy

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Source: ForexLive