Following a cumulative 450 basis point rate hike, the ECB has now elevated its deposit rate to an all-time high (4%).
The European Central Bank increased interest rates for the tenth consecutive time since July 2022 by 25 bps. This largely appears to be driven by a greater concern about the challenge of fully controlling inflation and the potential risks associated with prematurely halting this policy. It seems to outweigh apprehensions regarding the growing recession risk in the eurozone.
The ECB is worried about inflation, both now and in the future. Their latest projections show that in 2024, inflation is expected to be 3.2% due to higher energy prices, and it has been lowered for 2025.
Core inflation, which excludes energy, is also expected to be 2.9% in 2024 and 2.2% in 2025. These do not align with their goal of price stability and influenced their decision. Additionally, the ECB revised down its economic growth forecasts for the Eurozone, predicting 0.7% growth in 2023, 1.0% in 2024, and 1.5% in 2025.
In its statement, the ECB maintains that "based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target".
As such the 25bps hike is seen as a dovish hike, quite possibly the last in this hiking cycle. Given this, and the downgrades to growth, the EURUSD declined. The currency pair took another knock when US retail sales came in stronger than anticipated, and on the back of a stronger CPI print yesterday.
The EURUSD EMAs moved into bearish formation and its stochastic crossed down (black ellipses). Subsequently the EURUSD broke below 1.07, declining below the S1 and S2 pivots in a volatile reaction. If the stochastic maintains at the 20 or below levels (blue arrow), the forex pair will continue to be under pressure.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.