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ECB Marches on With Rate Hikes and Hawkish Tone

Miguel A. Rodriguez
Miguel A. Rodriguez
16 June 2023

As expected, the European Central Bank (ECB) rose its interest rate by 25 bps yesterday, but seemed to surprise markets with its hawkish stance that set the tone for further interest rate increases for as long as it takes until the inflation target has been met. 

Markets had already predicted that the ECB would raise its interest rate yesterday, so that came as no surprise. What did stand out about the ECB meeting was the “hawkish” tone demonstrated in both the bank’s statement and President Christine Lagarde's press conference.

The ECB's inflation forecasts remain high for the current year, well above the 2% target, while it also marginally lowered its growth projections for the eurozone downward

However, the ECB's Governing Council has stated that it intends to keep raising interest rates as long as necessary until the inflation target is met. No final level of rates was given, and the bank does not expect inflation to reach 2% until 2025.

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Therefore, everything points to a rise in European interest rates that will last for a considerable amount of time. Only an unexpected decline in inflation rates or a severe recession could alter the central bank's trajectory, but neither event is currently anticipated.

In Europe, market interest rates have increased in anticipation of future rate increases, particularly the yields on bonds at the short end of the curve. The Euro has benefited from this as well as a small drop in US Treasury yields.

EUR/USD has risen above 1.09 and broken through the 1.0920 resistance level, technically opening the way for additional gains towards the most recent highs in the region around 1.1100.

This drop in the value of the Dollar has supported gold, which has risen $30 from lows over the course of the day and crossed the $1,950 per ounce threshold.

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The North American stock markets have maintained their strong performance from previous days, rising despite predictions from the Federal Reserve that interest rates would rise again following the break from the previous meeting. Everything indicates that investors should no longer take into account the negative effect of the Fed’s restrictive monetary policy. On the positive side, there is a boom in technical stocks, the economy is expected to avoid a recession despite the tightening of monetary policy, and the rate hike process in the US is thought to be almost complete.  

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Sources: Bloomberg, Reuters 







Miguel A. Rodriguez
Miguel A. Rodriguez

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.