The ECB raised rates to 3%, the highest since 2008, and President Lagarde emphasized the need for future tightening. Energy prices have dropped, and the Fed has loosened monetary policy.
The European Central Bank raised interest rates by half a point, as expected, and President Christine Lagarde said another similar move was almost certain to follow next month, despite acknowledging that inflationary pressures are subsiding.
The ECB raised interest rates to 3%, the highest level since 2008. Lagarde warned that monetary policy tightening was not yet complete, despite the fact that energy prices have fallen significantly, and the Federal Reserve moderated the pace of monetary policy tightening at its meeting two days ago.
The Governing Council stated in the statement that it "intends" to raise rates by another 50 basis points at its March meeting and then "assess the further path of its monetary policy."
Eurozone bonds rose further on speculation that the pace of monetary tightening will slow. Money markets increased their bets on a half-point increase in March, but they reduced their bets on the final interest rate being less than 4%.
Following the European Central Bank's announcement yesterday, the markets perceived it as having a more dovish stance. This is due to the ECB stating that following their next 50 bps interest rate hike at their upcoming meeting, they will pause any further increases. Obviously, everything will depend on the inflation data published from now on, but if it shows signs of moderation, the probability of interest rates in Europe remaining at 3.50% is high.
For this reason, the yield on the 10-year German Bund fell by 20 basis points. Such a large movement in the Bund is quite unusual, indicating that the ECB statement had caught the market off guard.
Related: EUR/USD analysis and price predictions
As a result, the euro tumbled against the dollar, EUR/USD, losing more than 100 pips in the moments following the announcement. If the ECB is confirmed to be less aggressive than expected the EUR/USD pair's expectations for this year could be revised downward after analysts' median estimates placed it between 1.12 and 1.15.
However, we must consider the performance of the US dollar, which has remained under pressure following Powell's remarks. The yield on the 10-year American bond fell to around 3.34% yesterday. For the time being, the technical level to monitor and act as resistance/pivot is 1.0937, which is a 0.50% Fibonacci retracement of the entire bear leg.
Make sure to take note of Capex.com's economic calendar for today, as there are various events that may affect the forex market.
Sources: Bloomberg, Reuters