Market Reaction to the ECB's Decision to Raise Rates to 4.5%

15 сент. 2023 г.

According to the ECB report, published yesterday:

→ Inflation in Europe continues to decline, but will remain too high for too long.
→ Average inflation is forecast at 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025. This is an upward revision for 2023 and 2024, which mainly reflects rising energy prices.
→ The eurozone economy is forecast to grow by 0.7% in 2023, 1.0% in 2024 and 1.5% in 2025.

In order to combat inflation, the ECB decided to raise the key interest rate by 25 basis points to 4.5%, which was a surprise, since it was expected to remain at 4.25%. At the same time, the deposit rate reached a historical maximum.

Importantly, the ECB noted that "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” — this was perceived by market participants as a signal that the growth cycle (10 rate increases in a row) is completed.



As a result, the euro fell in price. As the chart shows, at yesterday's low, the EUR/USD rate fell below the previous low set on May 31 at 1.06352. The sharp downward momentum was also supported by strong data on the US dollar (the dollar index yesterday reached its highest since the beginning of March):

→ retail sales increased by 0.6% (expected +0.4%);
→ the number of unemployment applications for the month amounted to 220k (226k were expected).

The ascending channel, shown in blue, looks completely broken. And the price fits more and more into the downward channel (shown in red). Will the euro be able to recover from yesterday's fall?

Bullish arguments:

→ oscillators indicate that the market is oversold. For example, the RSI is near the 30 level;
→ the price may be supported by the lower border of the descending channel;
→ the price also approached the support at 1.0521, which affected the price twice this year.

Although if inflation in Europe remains high, given rising energy prices, then bullish arguments may not be enough to change the bearish price dynamics.

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