EUR/USD falters as ECB raises rates – still trades above 1.10.

Traders sold the shared currency as a reaction to the recent ECB decision, but the overall trend still remains bullish.

ECB mirrored Fed’s decision

After its favored inflation gauge softened for the first time in 10 months, the European Central Bank (ECB) did the planned (and fully priced-in) thing and slowed the pace of rate hikes, matching The Fed’s 25bps move yesterday, raising the primary rate to 3.25%.

This increase was accompanied by the statement, “The inflation outlook continues to be too high for too long.”

Policy rates will be raised to and maintained at restrictive levels by the Governing Council to bring inflation back to the 2% medium-term objective as quickly as possible.

Furthermore, the ECB emphasizes its reliance on statistics, saying the Governing Council will keep using data to determine the correct restriction intensity and duration.

Still data dependant

In particular, forthcoming economic and financial data, the pattern of underlying inflation, and the robustness of monetary policy transmission will continue to guide the Governing Council’s policy rate choices. The Fed’s concerns about sluggish responses to the monetary policy were repeated by Lagarde and her staff.

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The latencies and level of transmission to the actual economy are unknown, but “past rate increases are being transmitted forcefully to financing and monetary conditions in the euro area.”

T-LTRO language has remained the same since last month. As a result, the effects of repayments will be closely watched by policymakers.

As banks pay back the money they borrowed through targeted longer-term refinancing operations, the Governing Council will regularly evaluate the impact of targeted lending operations on its monetary policy stance.

As was also predicted, the ECB’s APP re-investments will end in July (while PEPP re-investments will continue through the end of 2024).

One more rate hike in the EU?

Prior to today’s decision, the market had anticipated that the ECB would raise its terminal rate in June and then again in September, for a total of three increases over the course of the year. The market’s initial response was a reduction in the expected terminal rate to roughly 3.55% (meaning one more rise and a minimal possibility of another after that).

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Technically speaking, the pair consolidates around the 1.10 level, with the resistance at 1.11, while the support could be near 1.10. Volatility has been low recently, and it looks like we might see a more significant move when the euro jumps above 1.11 or drops below 1.09.