The EURUSD has dropped as predicted, after the European Central Bank (ECB) announced it will raise rates next month. The rate hike is being cleared as the ECB will end its Asset Purchase Programme (APP) in early July, just as expected. We had already written about the Pandemic Emergency Purchase Programme (PEPP) which had already been wound down by the ECB in March, but at that time there was talk of shifting some of the PEPP into the APP. But now it’s all coming to an end.
For the first time since 2011, interest rates will rise at the next policy update due on 21 July because of the end of net asset purchases. According to the ECB, the conditions for interest rate lift-off have now been met, and it intends to raise rates by 25bp in July, bringing the deposit rate from -0.5% to -0.25%, and to raise the main refinancing rate and the marginal lending rate by similar amounts, and to raise rates further at the September policy meeting. It says of the possibility of a larger 50bp rise in September that: “if the medium-term inflation outlook persists or deteriorates, an increase of 50 basis points will be appropriate in September.”.
If the deposit rate was raised 50 basis points in September, the deposit rate would be in positive territory for the first time in a decade (0.25%). ECB officials said that further rate hikes are likely to be ‘gradual but sustained’ after September. Currently, there has not been any discussion regarding the ‘neutral’ rate. Some ECB policymakers wanted a 50bps hike in July and they had expressed this viewpoint ahead of the blackout period. President Lagarde said in her press conference that if 2024 inflation projections are at 2.1% or higher, the central bank will raise the rate by more than the 25bps.
The current scenario in Europe is that the ECB kept the EU Deposit Rate at -0.50%, the EU Refinancing Rate at 0.00% and will end the APP in July.
The sentiment indicator on ActivTrader shows that 64% of traders think that the 25bps is enough to warrant buying the EURUSD. However, the price action in the daily chart, shows that we’re now seeing the EURUSD pushing on the lower bounds of the recent range, with the move towards 1.0600 more likely than not.
The DAX was not happy with the ECB’s inflation projections and has now broken lower confirming that the swing high is well and truly set. The resistance level was Tuesdays low, and we could be about to witness a fall in the German bourse down to the rising trend line and the demand zone around 13,500. Global equities were all lower being led by the European bourses. The US major indices are currently lower but the S&P500 and Nasdaq are still trading within a well-defined range.
Also, in the news today, we also heard from Bank of Canada governor Macklem who hinted that a larger than 50bps rate hike may be needed as the chances of rates going above 3% had risen. The idea is to get rid of excess demand but not completely choke it off. So, it seems that multiple Central Banks are now not only in a rate hike cycle but also having to push interest rates higher and faster to keep up with the Fed.
The AUDUSD and NZDUSD have now both made a transition lower. The Kiwi had been weakening since the market opened on Sunday, but the Aussie has finally broken lower and is now catching up with its Antipodean counterpart. We talked earlier how a weakening euro would affect the US dollar, and here we can see that all being passed on to the less liquid commodity pairs. If we get a high CPI print tomorrow, that will give traders the impetus to sell the US bonds, raising benchmark yields and supporting the US dollar appreciation further.