Why EURUSD Fell Despite the ECB Hiking Rates to Record Highs

The EURUSD currency pair fell despite the European Central Bank (ECB) hiking interest rates for the 10th consecutive time to 4% from 3.75%, warning that inflation was “expected to remain too high for too long”.

However, the ECB signalled that this could be its last rate hike for now as it said: “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.”

The ECB revealed that it expects inflation in the 20 member states to fall back to 2.9% in 2024, with the figure falling back to 2.0% in 2025, which is acceptable to the central bank tasked with formulating monetary policies for the entire group of Eurozone countries. 

There are numerous concerns about the Eurozone economy, led by the fact that three of its leading economies, Germany, the Netherlands and Poland, are already going through a recession. Many more Eurozone economies are on the verge of a recession, too. 

Central banks worldwide have been raising interest rates to combat the record-high inflating betting that by hiking interest rates, consumers will borrow less. Hence, they will have less money to spend on goods and services, driving lower sales and prices. 

However, inflation levels have remained stubbornly high due to global record-high fuel prices affecting almost everything. Secondly, workers have been asking for and getting pay increases, meaning they have more to spend, keeping inflation high. 

Returning to the euro, the primary reasons behind its decline yesterday were twofold. First, the ECB announcing an end to its rate hiking cycle is a dovish signal to the market, indicating that the euro has reached its peak and should be falling now. 

On the other hand, the ECB admitted that the Eurozone’s growth prospects had declined on the past rate hikes and that the situation would worsen with the latest rate hike, which could diminish the region’s chances of a positive economic outcome in the coming months. 

Therefore, this is why the EURUSD fell despite the ECB announcing its 10th rate hike. 

The EURUSD price chart. 

The EURUSD currency pair fell despite the European Central Bank (ECB) raising interest rates to record highs.