As mentioned earlier, there was a great deal of uncertainty over whether the European Central Bank would opt for a 25- or 50-basis point rate hike today, which meant that the euro would move sharply based on the decision as the market was unsure.
Will, the euro surged higher after the ECB decided to hike the main deposit rate by 50 bp to zero, and introduced a new tool to counter “unwarranted, disorderly market dynamics.”
The ECB has indicated that further normalisation of interest rates “will be appropriate.”
Some would argue that it was a bit careless on their part to hike by 50 bps given that their communication all this time was for 25 bps. But what really changed that decision was threefold:
- First, the recent weakness of the euro meant that the eurozone was now importing more inflation than would have been the case had the single currency been stronger. This definitely encouraged the hawks to push for a 50 bp hike today.
- Second, Eurozone CPI climbed to a fresh record high of 8.6% YoY in June, accelerating sharply from 8.1% in May. They simply cannot afford to just sit there and watch inflation continue to accelerate.
- Third, all other central banks opted for larger increases than expected. The ECB had to surprise, otherwise the euro would have plunged – and they couldn’t risk that.
So, it was a case of common sense prevailing. Let’s see if Lagarde will now try and put a bit of a dovish spin on that when she starts the ECB press conference. She will be pressed about the new policy tool – Transmission Protection Instrument. TPI sounds fancy, but the lack of detail and how it will be implemented is what might worry some investors.
But for now, the EUR/USD has risen along with the other euro pairs, most notably the EUR/JPY, which could be heading towards 145.00 next:
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