The Euro Steadies After the ECB’s Double Hike

This was the sixth consecutive hike and took the main refinancing rate to 3.5%, the highest since 2008.

The statement and the Executive Board in the subsequent press conference brushed off major concern over the banking system and stressed instead rising expectations for inflation. Inflation is now expected to average 5.3% in 2023, a drop from levels seen in the second half last year but still significantly above target and higher than had been expected in projections from December.

It would be difficult for inflation to continue rising when rates have gone up so sharply in such a short time, but in the eurozone as elsewhere the drop hasn’t been as strong as central bankers might have hoped. According to the ECB’s projections, it’s unlikely that inflation will reach 2% in the euro area until around the third quarter of 2025.

The Bank of Canada was last week the first major central bank to pause hiking, in that case at 4.5%. Although it seems nearly certain now that the ECB will end up higher than the 3.2% predicted late last year, it still seems unlikely that it will go as high as the BoC or the Fed unless current trends in data change dramatically. From a fundamental perspective, that might suggest negativity in the longer term for the euro although the differential with the Fed will probably continue to shrink next quarter.

Euro-dollar, H4 Chart Analysis

Concern in stock markets of a general financial crisis after SVB’s failure and the Fed’s intervention to rescue depositors has mostly boosted the dollar’s appeal as a haven. However, the ECB’s determination to push ahead with a double hike yesterday has brought some positivity. Economic data between the two currencies don’t necessarily suggest strength or weakness for either: while job data are significantly weaker in the eurozone than the USA, the opposite is the case for annual GDP from the latest figures.

On the chart, the key area of resistance is clearly the 100% Fibonacci retracement which was the starting point of the long uptrend in 2020. This is a very wide area but gains much above $1.075 are unfavourable for now. Below this, this 200 SMA might also be an important medium-term resistance.

TA overall seems to be somewhat optimistic due to the golden cross of the 50 SMA over the 100 on Monday night, no sign of overbought, high volume of buying and a high ATR. The response to yesterday afternoon’s initial kneejerk downward has also been strong so far. As noted above, though, a long-term uptrend for the euro is unclear and probably not likely to develop yet.

Euro-pound, H4 Chart Analysis

EURGBP has been more consistently negative than EURUSD over the last few weeks for a number of reasons. The most important of these this week are significantly strong British job data than expected and the troubles plaguing Credit Suisse. Claimant count change for January was unexpectedly revised down to negative 30,300 on Tuesday while the rate of unemployment in the UK held at 3.7% against expectations for an increase.

Although various technical indicators on the chart display similar signals to euro-dollar, the focus for euro-pound is on the death cross of the 50 SMA below the 200 and the failure to break above the 100 SMA early on Wednesday morning. The strong rejection from around 88.4p might suggest further losses, but the key 50% Fibonacci retracement coincides with a fairly strong bounce from 87.5p. That might be a difficult support to break, having also been tested unsuccessfully around two months ago, so a range might establish over the next couple of days ahead of British inflation on Wednesday 22 March.

Next week’s inflation from the UK is likely to be overshadowed by the meetings of the Fed and the Bank of England, but for euro-pound in particular it’s a critical release. A decline below double digits to 9.6% as expected might suggest a bounce by the euro, but traders will also monitor the Monetary Policy Committee’s comments on Thursday next week very closely. The statement at 12.00 GMT on 23 March expected to announce a single hike of the bank rate.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.