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Monetary Policy ECB Shakes Currency Markets

Monetary Policy ECB Shakes Currency Markets

04-02-2022 09:04

The European Central Bank (ECB) Shook Currency Markets Announcing Monetary Policy on Thursday

Euro rate turned higher against USD

Monetary Policy Announcement

In yesterday’s monetary policy announcement, the ECB still maintained its benchmark interest rate at 0%, lending facility at 0.25%, and deposit facility at -0.5%.

In fact, inflation in the eurozone reached a record high of 5.1% year-on-year (YoY) in January, and is expected to be even higher before finally declining.

“Inflation is likely to continue to rise and last longer than previously predicted, but will decline this year,” ECB President Christine Lagarde said at a press conference on Thursday.

According to him, the current increase in inflation is due to high energy and food prices.

“Compared to our expectations in December, the outlook for inflation risk remains upward, particularly in the short term. If price pressures are also driven by higher-than-expected wage increases or the economy returns to full capacity sooner, inflation will be even higher, said Lagarde.

Lagarde has always said interest rates are unlikely to be raised this year. But when asked again about the matter he said he would assess his condition carefully and “depending on the data”.

This strengthens speculation the ECB will follow other major world central banks in raising interest rates this year.

As a result, the euro exchange rate which previously weakened 0.33% turned up 1.2% against the US dollar.

Interest Rates Benchmark

Markets now see an 80% probability that the ECB will raise its benchmark interest rate by 10 basis points in June, and there is a 100% probability of a 40 basis point increase by the end of the year.

“Today’s ECB has left room for market speculation if there will be monetary policy tightening this year,” said Stefano Pesole, currency strategist at ING, as reported by CNBC International on Thursday.

In addition to the ECB, there is the British central bank (Bank of England / BoE) which also announced monetary policy yesterday. The BOE again raised its benchmark interest rate by 25 basis points to 0.5%. Thus, the central bank led by Andrew Bailey has raised interest rates for the second month in a row, the first since 2004. Last December, the BoE raised interest rates by 15 basis points, becoming the main central bank to raise interest rates.

In yesterday’s policy announcement, it was revealed that from 9 members of the Monetary Policy Committee (MPC), 5 people chose to raise interest rates by 25 basis points. The other 4 people, instead of being more dovish, chose to raise interest rates by 50 basis points to 0.75%.

This is a surprise, meaning that the BoE will be aggressive in raising interest rates this year, and it is possible to do it again in the near future.

EURO Currency Index – Technical Analysis

Monetary Policy ECB Shakes Currency Markets
Graph taken from TradingView.

Euro bullish fake out on daily timeframe and back bullish to Moving Average 100. Next week, we might see a bullish continuation on the EUR pair. EURUSD for example.

WHAT ZFX THINKS…

If EURO manages to hold its support at 112.00 and reclaim its 115.00 level, then we can see a bullish continuation on EURO Currency Index. It means that trading pairs like EURJPY, EURGBP, EURUSD can go bullish further next week.

Risk Warning: The above content is for reference only, and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations carried out in accordance with this article. Please be firm in your thinking and do the corresponding risk control.

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