Euro craters after the ECB signaled they are almost done tightening

• ECB will ensure that the policy rates will be brought to levels sufficiently restrictive
• ECB expects to discontinue the reinvestments under the APP as of July
• ECB slows rate hiking pace to 25bps (as expected), bringing key rate to 3.75%

The ECB kept the door open for more hikes but it looks like they are positioning for the June or July meeting to take rates to a restrictive level.  They will be data-dependent as they are aware that the lags and strength of transmission to the real economy remain uncertain. Inflation is too high so they had to say that they will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target.

The ECB slowed their rate hiking pace to a quarter-point, bringing the Main Refinancing Rate to 3.75%, one of the lowest rates against the other major central banks.  These last few meetings were supposed to be the time when the ECB plays catch up with their rate hikes, but it is starting to look like they might be done tightening soon.

The euro tumbled alongside European bond yields after the ECB statement.  US jobless claims posted the biggest rise in six weeks and a hot unit labor cost report for the first quarter also gave the dollar some support.  Jobless claims rose 242,000, slightly above the 240,000 consensus estimate and an increase from the prior 230,000 reading.  The US labor market is softening, albeit not quickly enough to justify rate cuts. Sticky US inflation should keep the Fed on hold until year end.

All eyes will be on ECB’s Lagarde press conference as she will have a lot to clarify from the statement.

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