Euro Heads Higher Post ECB Hike

It has been a busy week for the euro, reflecting the gyrations we’re seeing in the financial markets. EUR/USD has bounced back from a mid-week slide and is trading at 1.0661, up 0.46% on the day.

ECB moves full steam ahead

Amid market turmoil and fears of a full-blown financial crisis, the ECB held its rate meeting on Thursday and had everyone guessing its intentions. The central bank had strongly signaled it would raise rates by 50 basis points, but the bank crisis certainly complicated matters. Credit Suisse shares tumbled by as much as 30% a day before the meeting, weighing on the euro and eurozone bonds.

It would have been understandable if the ECB had opted for a 25-bp move due to the market mayhem, but the central bank kept its word and delivered a 50-bp hike, bringing the main rate to 3.0%. Was the 50-bp hike risky in these volatile conditions? Yes, but policymakers may have been encouraged by the Swiss National Bank stepping up and lending Credit Suisse $53 billion. There was the issue of the ECB’s credibility after President Lagarde had essentially pledged a 50-bp increase. Also, a 50-bp was the strongest medicine the central bank could deliver in the fight against sticky inflation.

Inflation may have been knocked out of the headlines this week, but it hasn’t gone anywhere and remains the ECB’s number one priority. There was good news as the ECB’s inflation projections were revised downwards from December. Currently, inflation is expected to average 5.3% in 2023 and 2.9% in 2024, compared to the December estimate of 6.3% in 2023 and 3.4% in 2024.

In her press conference after the meeting, President Lagarde was careful not to commit to further rate hikes, saying that rate decisions will be “entirely data dependent.” Still, with inflation well above the 2% target, it’s a safe bet that the ECB is not done with the current rate-tightening cycle.

EUR/USD Daily Chart

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