Key points:
- The EURUSD pair fell despite the ECB hiking rates by 0.75%, as expected.
- Today’s decline seems more like a natural pullback as it has been rising.
- However, the pair could keep making gains if the dollar continues falling.
The EURUSD currency pair fell despite the European Central Bank (ECB) raising interest rates by 75 basis points as expected and hinting at future rate hikes. However, the sentiment around the Euro remained dovish as the ECB maintained its asset purchases, which it will continue reinvesting.
The markets faulted the central bank for not doing more to contain record-high inflation like leading central banks such as the Bank of England and the US Federal Reserve, which have slashed their bond purchases to reduce market liquidity.
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The ECB has a tricky balancing act as some EU countries require more support than others. The central bank recently unveiled a new mechanism known as the Transmission Protection instrument (TPI) to help Portugal, Italy, Greece and Spain, also known as the PIGS countries, stabilise their bonds to avoid a similar situation to what happened in the UK.
The Eurozone’s largest economy Germany recently unveiled a massive support program worth 200 billion euros to support businesses and consumers through the upcoming winter as Russia cuts its energy supplies to the country.
In 2021, over half of Germany’s gas supplies came from Russia, which left the country highly exposed when Russia launched its war against Ukraine in February. Moreover, the country is about to go through a very tough winter with minimal gas supplies; hence, the recent measures to cushion its citizens.
Germany’s move will likely cause friction with its neighbours, who may not have the same capacity to cushion their citizens given the massive sum it is spending on the program. The ECB still has to set policies that balance the interests of all its members. In terms of fighting inflation, the ECB is quite late to the party, given that the Fed has been raising interest rates for some months.
The Euro has been rising against the dollar this past week and today’s decline seems more like a normal pullback. The EURUSD pair could keep rising as the US dollar index pares back its gains.
*This is not investment advice.
The EURUSD price chart.
Despite the ECB rate hike, the EURUSD currency pair was trading down 94.3 pips (0.94%).