The European Central Bank confirmed market expectations by raising borrowing costs to their highest level in 22 years, showcasing its determination to tackle high inflation amid the eurozone’s sluggish economic performance.
Analysts and investors were betting on another 0.25 percentage point hike. The prediction was later confirmed as the ECB raised its key interest rate for the eighth consecutive time to 3.5%, the highest level since 2001.
The ECB decision is projected to have significant implications for the euro and its future trajectory, prompting investors to closely monitor the central bank’s approach to further rate increases and its assessment of the economic landscape.
The ECB stated that it will maintain these restrictive interest rates until necessary for inflation to return to the 2% target. It expects inflation to remain above its 2% target and hinted at further rate hikes in the future to achieve its inflation goal.
Economists predict another 25 basis point increase in the deposit rate, with further moves anticipated in July.
Eurozone stagnation
Despite the U.S. Federal Reserve breaking its rate hike streak, indicating the tightening cycle nearing its end, inflation in the eurozone remains unacceptably high at 6.1%, more than three times the ECB’s target.
Growth stagnation persists across the eurozone, while inflation has been moderating due to lower energy prices and the ECB’s record-breaking interest rate hike. The deposit rate is now projected to peak at 3.85%, indicating a higher likelihood of an additional rate move after July.
The central bank is now expected to continue its tightening approach, having failed to predict the current inflation surge and raised rates later than its global peers.
“The bigger question is about the forward guidance,” said JPMorgan economist Greg Fuzesi. “We are not convinced that the statement will signal or suggest that a July hike may be the last.”
In addition to ECB, investors’ focus is also shifting toward upcoming decisions by the Bank of Japan on Friday. The yen dropped 1% to 141.50 per dollar, reaching a level last seen on November 23.
Concerns are rising about whether a further yen appreciation could prompt intervention from the central bank. The Japanese government expressed its disapproval of volatile currency market movements and stated that appropriate action would be taken as necessary.
Market expectations
Following the recent decision by the Federal Reserve, the EUR/USD currency pair has managed to hold above its 100-day moving average, indicating more bullish sentiment.
The Fed’s decision broke a streak of its ten consecutive rate hikes, but the dot plot revealed that policymakers anticipate two more surges by the end of this year.
The dollar index rebounded 0.2% to 103.09 earlier today, recovering from a four-week low of 102.66. The euro remained unchanged against the dollar at $1.0841, having reached a four-week high of $1.0865 on Wednesday.
Market expectations include a 25 basis point hike this week, followed by another hike in July before a pause. The ECB’s staff projections and post-meeting comments may provide further insight into the bank’s future actions.
From a technical perspective, EUR/USD has been trading within a 250-pip range, awaiting clearer direction. While the euro’s technicals are favorable, a more hawkish ECB stance may lead to a quick upward movement towards 1.1000.
However, large option expiries and the possibility of a “dovish” 25 basis point hike could push EUR/USD back towards the 1.0700 range in the short term.
“Our preference is for the US economy to do better than the euro zone … and hence the dollar looks like a more attractive currency to buy compared to many other currencies, including the euro,” said Kristoffer Kjær Lomholt, head of FX and corporate research at Danske Bank.