The ECB delivered its most significant rate hike since the start of the montary union, with a 75bps increase. At face value, the central bank seems determined to bring down the Euro Area's rampant inflation, which last printed at 9.1% YoY.
The top chart shows the spread between the German 2-yr and US 2-Yr notes. It's moving up, indicating the aggressive swivel in ECB policy. However, the EURUSD (bottom chart) continues to trend down. One explanation is the ECB contractionary monetary policy can do little against the mainly supply-side inflation. Another is the perception that the ECB is downplaying the probability of recession.
In other words, the ECB has front-loaded and communicated that it is fully determined to do more, but the market may not be buying into the narrative. If the central bank cannot significantly impact Eurozone inflation, the higher rates won't bring inflation down to its target but will adversely affect economic activity.
If this is the case, the greenback remains compelling as a haven. This is despite the EU Zone's yields appreciating - hence the inverse relationship between the top and bottom charts.
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.