How markets might react to the ECB
FXE•Euro may need a stronger signal from Lagarde
Meanwhile in FX, the high probability of a rate hike means new tailwinds for EUR-USD are unlikely, according to the note.
"The scope for a further recovery of the common currency will probably depend more on how explicitly Lagarde signals possible additional tightening at her press conference," it said - but noted that she likely won't give much away, and again pointed to markets already pricing in more hikes which suggests little support for EUR-USD.
Markets eye ECB guidance more than the rate hike
It looks highly likely that the European Central Bank will hike interest rates by 25 basis points later this week.
Investors are therefore mostly keen to get any clues about what might come next - and that's also what might trigger a market reaction, according to UniCredit strategists and economists.
They noted that eurozone rates have moved higher since the July ECB meeting, while curves have steepened moderately.
"The upcoming ECB meeting is likely to consolidate the current picture for eurozone fixed income markets," they said, adding that a hike is expected, and new economic forecasts probably won't weigh on EGBs.
"The central bank rhetoric is likely to remain hawkish, keeping market expectations of further hikes lively."
UniCredit sees limited short-term relief for EGBs
However, UniCredit expects the ECB to be less aggressive with its hikes than current market expectations - which should provide some relief to EGBs in the medium to long term. In the short-term, they expect yields to stay elevated thanks to headwinds like the energy shock and heavy issuance.
