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EUR came under heavy selling pressure yesterday, despite hiking rates by a further .25%. The majority of market players had been anticipating a pause from the ECB, making the hike something of an outlier. Despite the further .25% increase, the bank gave a firm signal that this should be the last rate hike. In a new addition to the bank’s statement on monetary policy, Lagarde noted that interest rates had now “reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target”.
 

Rate Cut Speculation

The bank reaffirmed its intention to remain data-dependent going forward. However, this now looks skewed more towards deciding how long rates should stay at current levels (before eventually dropping lower) than a further hike. Given the downside in EUR on the back of the meeting, the battle now will be for the ECB to push back against rate cut speculation on any forthcoming eurozone data weakness to help prevent a heavy weakening of the euro which might exacerbate inflation. Looking ahead, EUR looks likely to remain skewed to the downside, particularly if we see any fresh move higher in USD.
 

Technical Views

EURUSD

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With the retest of the broken 1.0785 level seeing the area hold as resistance, the focus is firmly on a continuation lower near-term. Momentum studies remain bearish here, keeping the focus on a test of 1.0515 next. This will be a key area for the market and, while we might see some initial stalling, the outlook remains in favor of a break lower while we hold below 1.0785. 

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