ECB hike sends euro soaring

EUR/USD hasn’t posted a winning week since August, but a spectacular rise today should put that trend to rest. In the European session, the euro is trading at 1.0102, up an impressive 1.03%.

ECB delivers

There were plenty of expectations ahead of Thursday’s ECB meeting, as the markets waited to see if the ECB would raise rates by 0.75% or play it safe with a smaller hike. Earlier in the week, eurozone yields and the euro dropped on reports that the ECB was looking at a 0.60% increase. In the end, the ECB came out with all guns firing, raising rates by 0.75% for only the second time in its history.

The main driver behind the dramatic move is spiralling inflation, which hit 9.1% in August. The ECB is lagging behind other central banks, with the benchmark rate currently at 1.25%. This will not tame inflation, and at the meeting, the ECB revised upwards its inflation forecast for 2023, from 3.5% to 5.5%. At the same time, the ECB is sending a powerful message that it is serious about curbing inflation by tightening, even at the risk of a recession. Investors have reacted positively to the move, sending the euro sharply higher.

What’s next for the ECB? Christine Lagarde was unambiguous when said that she is planning more rate hikes “because inflation remains far too high and is likely to stay above our target for an extended period”. Lagarde went further, saying there could be up to four more hikes in the current rate-tightening cycle. The markets have priced in 0.50% increases for the October and December meetings.

Lagarde & Co. have clearly shown that they are willing to pay the price for higher rates, which is weaker growth that could result in a recession. The weak economic climate in Germany and the eurozone has been exacerbated by a potential energy crisis, with Russian President Putin declaring yesterday that he might cut off energy exports to Western Europe. Putin may or may not be bluffing, as the eurozone scrambles to find alternatives to Russian oil and gas before winter.

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EUR/USD Technical

• There is resistance at 1.0056 and 1.0152
• 0.9984 has switched to support, followed by 0.9888

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