EURUSD Rises After the ECB’s 0.50% Rate Hike – What’s Next?

The EURUSD currency pair was trading up over 25 pips as the single currency rallied against the US dollar following yesterday’s massive crash driven by market uncertainties. The European Central Bank’s 50 basis points rate hike further boosted the euro.

However, given the small size of its gains, the currency pair did not have significant upward momentum as investors waited for the speech by ECB Governor Christine Lagarde. The ECB’s 0.50% rate hike showed the central bank has confidence in the region’s banking system.

Furthermore, the ECB clarified that its policy toolkit was fully equipped to support any Eurozone banks that might need liquidity support as the global financial system remains at risk of further bank failures following the collapse of Silicon Valley Bank and Signature Bank. 

Investors were relieved after the ECB said it would look at future data points before deciding if further rate hikes were needed. However, analysts are betting that the ECB will be forced to adjust its macroeconomic projections given the recent turmoil in the financial markets. 

The weakest link in the European banking system, Credit Suisse, has finally been stabilised by the Swiss National Bank, which promised to bail it out if it faces a significant liquidity crunch that it could not handle. The SNB’s reassurance will likely prevent a bank run by Credit Suisse’s depositors. 

However, some analysts have raised concerns about the ECB’s 50 bps rate hike in the face of the recent financial turmoil. Many compared the move to what happened in 2008 and 2011 when the central bank kept raising rates during a developing financial crisis.  

Still, some have argued that the circumstances facing the old continent are pretty different this time since the rules passed after the 2008 financial crash and the 2011 banking crisis mean that most banks are well-capitalised and regulators are monitoring their levels of risk exposure. 

Unfortunately, market crashes and banking crises are notoriously hard to predict, given that the factors leading to bank failures are usually quite different despite the underlying causes being easy money policies and rate hikes. 

*This is not investment advice. 

The EURUSD price chart.

The EURUSD currency pair was trading up 25.6 pips (0.24%) as the euro recovered against the US dollar.