ECB Raises Key Interest Rates for a 10th Consecutive Meeting

ECB’s Deposit Rate Pulled to Fresh ATH

In what many desks have termed a ‘dovish hike’, the European Central Bank (ECB) raised all three key benchmark rates by 25bps today, which pulled the Deposit Facility Rate to an all-time high of 4.00%, effective from 20 September. Furthermore, the Main Refinancing Rate and the Marginal Lending Facility Rate increased to 4.50% and 4.75%, respectively.

ECB President Christine Lagarde took to the stage shortly after the rate announcement and hinted that we are nearing the end of the policy-tightening schedule but never explicitly confirmed anything. In the ECB Governing Council Press Conference, Lagarde added, ‘Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.

The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction’.

The central bank’s inflation forecast was revised higher for this year and the next but lower in 2025. ECB projections forecast an increase in inflation this year from 5.4% to 5.6%, and from 3.0% to 3.2% in 2024 and finally from 2.2% to 2.1% in 2025. The ECB noted in its press release the underlying reason behind its upward revisions is due to higher energy prices. Regarding growth, ECB projections forecast that economic activity will contract to 0.7% this year, down from 0.9% and from 1.5% to 1.0% in 2024.

Euro area inflation remained at 5.3% in the month of August, poised to enter a phase of sticky inflation alongside stagnant growth: stagflation.

What Does This Mean for the EUR/USD?

Following the rate announcement, Europe’s single currency retreated against all its G10 peers. The EUR/USD currency pair is down -0.7% as of writing and attempting to elbow past major daily support from $1.0689.

You may recall that the FP Markets Research Team released an analysis on the EUR/USD in this week’s Weekly Market Insight https://www.fpmarkets.com/blog/market-insight-week-ending-15-september/, detailing a potentially bearish scenario.

As evident from the monthly timeframe, scope to discover lower levels remains on the table for the currency pair until it reaches support from $1.0516; this follows an earlier rejection of resistance at $1.1233 in July, which happened to share chart space with the 50-month simple moving average at $1.1164. Adding to this bearish vibe, price action on the daily timeframe recently dipped a toe in waters south of support from $1.0689, possibly clearing the runway south until reaching the monthly support level highlighted above at $1.0516.

So, technically, this perhaps opens the door for short-term sell-on rally scenarios on the H1 scale. Given the current technical picture across the higher timeframe, technical analysts are likely expecting price action to remain south of daily resistance at $1.0689, with further underperformance until at least the $1.06 handle and H1 support at $1.0572.

Charts: TradingView

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