Euro takes a tumble after ECB’s hike

• ECB delivers ‘dovish hike’
• EUR/USD sinks 0.80% on Thursday
• US to release manufacturing and consumer confidence reports on Friday

The euro has steadied on Friday. In the European session, EUR/USD is trading at 1.0665, up 0.20%.

Euro slides on ECB’s dovish hike 

The European Central Bank’s rate decision went right down to the wire on Wednesday. It was unclear whether the central bank would hike or hold, with strong reasons to support each position. In the end, the ECB opted to hike, choosing the fight against inflation over the threat of recession.

The ECB raised its key interest rate to a record high of 4.0%, but the euro responded with sharp losses. The reason? The ECB rate statement signalled that the rate-tightening cycle is likely over, which sent the euro and eurozone bond yields lower and European stocks higher. EUR/USD fell 0.80% on Wednesday and dropped as low as 1.0631, its lowest level since March.

ECB policy makers have been grappling with a dilemma, which made the rate decision so difficult to call. Inflation is running at a 5.3% clip, more than double the target rate of 2%, but high borrowing costs and the slowdown in China have weighed heavily on eurozone growth. In the eurozone, the services sector has been weakening and manufacturing continues to contract. Germany, the traditional locomotive of the eurozone, is likely in recession and is struggling with an inflation rate of 6.1%.

Against this background of high inflation and sluggish growth, the ECB opted for a ‘dovish hike’, with the rate statement noting that rates have likely reached the peak level. Lagarde didn’t shed any light on the ECB’s rate path, but the futures markets brought forward expectations of a rate cut to June 2024, compared to September 2024 before the rate decision.

Lagarde stated at a follow-up press conference that it’s too early to say that rates have not peaked, but the markets beg to differ and are already looking ahead to rate cuts, which indicates some dissonance between the stances of the central bank and the markets.

In the US, the week wraps up with two tier-1 events. The Empire State Manufacturing Index, which plunged to -19 in August, is expected to improve to -10 points. UoM Consumer Sentiment is expected to dip to 69.1, down from 69.5 and inflation expectations are projected to remain unchanged at 3.5%.

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EUR/USD Technical

• EUR/USD is testing resistance at 1.0654. Next, there is resistance at 1.0732
• There is support at 1.0609 and 1.0531

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