ECB Hikes by 25bps Keeping Options Open, EUR/USD, EUR/GBP Slide

ECB RATE DECISION:

The European Central Bank has raised interest rates by 25bps in line with expectations while stressing that inflation is still expected to remain elevated for a longer period despite the recent declines. The Central Bank also decided to set remuneration of minimum reserves at 0%. This decision the Central Bank said will preserve effectiveness of monetary policy by maintaining the current degree of control over monetary policy stance and ensuring the full pass-through of interest rate decisions to money markets.

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The ECB stated that moving forward policy rate decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term target. The Central Bank confirmed that developments since the last meeting support the expectation that inflation will drop further, however the speed at which inflation is falling still remains an area of concern for the ECB.

On the APP front the ECB mentioned that the portfolio is declining at a measured and predictable pace. As concerns the PEPP, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024.

The ECB Press Conference Begins Shortly.

ECB President Lagarde remained non-committal in her press conference when asked about the possibility of a hike in September. This is a dovish sign given the President had been rather hawkish previously when pressed on future rate hikes. President Lagarde also left the door ajar for swift changes in policy should the need arise stating that the Central Bank may vary from one meeting to the next while stressing a September pause would not necessarily be for an extended time. A real mixed bag from the ECB with Lagarde confirming the wording change in the statement was not random or irrelevant.

LOOKING AHEAD

The rate hike path for the European Central Bank (ECB) has been made all the more murkier moving forward following a poor showing on the data front of late for the Euro Area. This will no doubt cause tension among policymakers with differing views on the path of monetary policy moving forward. As previously mentioned, inflation appears to be on the way down despite risks being skewed to the upside.

The policy statement left the door ajar for further hikes moving forward with the ECB stressing the length of time to bring inflation under control. The recent batch of economic indicators particularly around PMI data and bank lending surveys appearing to have very little sway at this stage. In the aftermath of the decision and ahead of the press conference markets are still pricing in further hikes this year from the ECB.

MARKET REACTION

EUR/GBP Daily Chart

Source: TradingView, prepared by Zain Vawda

The initial reaction on EURGBP saw the pair spike lower before recovering some losses just ahead of the press conference. EURGBP does appear to have found support around the 0.8560 mark following a selloff in the early part of this week. Resistance on the upside remains strong around the 0.8700 handle as we have both the 100 and 200-day MAs resting there which could cap any attempted push higher.

EURUSD Daily Chart

Source: TradingView, prepared by Zain Vawda

EURUSD initial reaction saw a 50 pip drop as we approach the ECB press conference. The drop is surprising given the ECB haven’t completely ruled out further hikes in 2023. The bigger picture for EURUSD continues to favor bulls as long as we remain above the 1.0840 handle.

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IG CLIENT SENTIMENT

IGCS shows retail traders are currently SHORT on EURUSD, with 56% of traders currently holding SHORT positions. At DailyFX we typically take a contrarian view to crowd sentiment, and the fact that traders are short suggests that EURUSD may find the downside limited before price begins moving higher.

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda