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16.03.2023 08:15 PM
EUR/USD. The ECB implemented the baseline scenario by raising rates by 50 points

The European Central Bank implemented the base scenario by raising interest rates by 50 basis points as a result of the meeting's results in March.

A few days before today's meeting, the market began to question the determination of ECB members. Several analysts and market participants were confused by the failure of numerous large banks in the United States (mainly SVB) as well as the concern surrounding the Swiss bank Credit Suisse.

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For instance, on the day of the meeting, experts at Deutsche Bank predicted that the ECB would raise interest rates by merely 25 basis points or perhaps adopt a wait-and-see attitude. Barclays Bank economists issued a similar forecast yesterday. In particular, Barclays stated that there is a 60% possibility of a 25-point rate increase, a 20% risk of a 50-point rise, and a 10% chance of the rate remaining the same. Yet, the European Central Bank has disregarded investor requests to delay policy tightening or slow the rate of rate increases (at least until sentiment stabilizes). Today, the regulator put into practice a hawkish scenario that was first announced in February.

It cannot be said that today's judgment turned out to be dramatic if there is no irony. On the eve of the meeting, critical insider information was released to the media. For instance, Reuters journalists on Wednesday reported a rate rise of 50 points; according to anonymous sources in the ECB camp, the regulator's members are not exploring alternative scenarios because they are worried about damaging their credibility and causing market volatility. Not to mention the infamous inflationary factor, which continues to cause the Central Bank "headaches."

Market reaction

The hawkish situation did not benefit EUR/USD buyers, which is significant. The pair experienced a sharp decline to 1.0550 before briefly reclaiming some of the lost positions. Nonetheless, despite the northern pullback, a northward breakthrough is unquestionable. Despite its determination, which some currency experts questioned, the ECB did not support the euro.

The market's reaction ultimately failed, primarily as a result of the Central Bank's inconsistent signals. On the one hand, the regulator was worried about inflation, which in February started to increase at a rapid pace once more across the nations of the eurozone. On the other hand, during the following meeting, the Central Bank opted not to announce an increase in interest rates.

According to Christine Lagarde, the relevant decisions will be made by "evaluating the prospects for inflation in light of incoming economic and financial data, the dynamics of core inflation, and the efficacy of monetary policy." For instance, it should be noted that the President of the ECB informed the markets about the impending "substantial" rise after the meeting's outcomes in February. As we can see, the situation has changed today.

The fate of the rate is currently in the "hands" of inflation, according to the economists of the Swedish financial group Nordea. In addition, based on Christine Lagarde's rhetoric, the European Central Bank will largely concentrate on the movements of the core consumer price index, which excludes prices for food and energy. Let me remind you that the core CPI ended February at 5.6% (with an anticipated fall to 5.2% from the previous number of 5.3%) and updated the historical record once more, demonstrating upward dynamics. The overall consumer price index was down 8.5%, compared to the 8.2% that most experts had predicted.

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According to Nordea economists, the ECB will raise the rate by 25 points in May and continue to base its decisions on new data if the core inflation index rises once more in March (or even if it stays at the same level). Several analysts predict that the European Central Bank will advance at its meeting in May only if March inflation is higher than in February. Any signs of a standstill or a slowdown in growth will be used to support the status quo.

Conclusions

Despite recent developments in the U.S. and European financial sectors, the European Central Bank adopted a "hawkish" scenario in response to the meeting's outcomes. The ECB stepped on the gas and increased rates by 50 points, ignoring the current developments and retaining an "unperturbed look," in contrast to the requests of several economists to maintain a wait-and-see stance. This factor helped the euro, which allowed the pair to leave the area of the fifth figure. Yet, Lagarde's rhetoric as well as that of the supplementary statement in general were highly vague. About its future actions, the ECB has maintained uncertainty.

All of this suggests that the EUR/USD pair is likely to see a strong bearish mood. While the dollar is steadily improving its position as a result of the rise in hawkish expectations regarding the Fed's future activities, the European Central Bank has not turned into an ally of the euro. The market anticipated immediately after the US "bankfall" that the Federal Reserve could temporarily hold off on hiking rates in March. Nevertheless, once the first emotions dissipated, traders started to look at the issue more realistically. The current consensus forecast predicts a rate increase of 25 points following the outcomes of the March meeting.

In terms of technology, the price on the daily chart is placed under all of the lines of the Ichimoku indicator (including the Kumo cloud), as well as between the middle and lower lines of the Bollinger Bands indicator. All of this points to the southern scenario as having priority.

The initial and current key target is the 1.0510 mark (the lower line of the Bollinger Bands indicator on the same timeframe).

Irina Manzenko,
Analytical expert of InstaForex
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