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Final ECB hike fails to support the euro, EUR/USD touches multi-month lows (Daily analysis 14.09.2023)

14 Sept 2023 15:30|Bartosz Sawicki

The eurozone deposit rate has reached 4% for the first time ever, following today's tenth consecutive hike by the European Central Bank. It was the fourth consecutive move of 25 basis points, which most likely closed the monetary tightening cycle that began several months earlier.

Final ECB hike fails to support the euro, EURUSD touches 4-month lows

The decision was highly emotional. A marginal majority of the 66 institutions surveyed by Bloomberg expected the current monetary policy parameters to be maintained. A slightly different view was taken by investors, who priced in an increase with an almost 65% probability. In the eyes of the ECB's Governing Council, the weakness of the eurozone economy, which will grow by a meagre 0.5% this year, was pushed aside by the prospect of persistently burdensome inflation. Indeed, the ECB's forecast of 3.0% year-on-year consumer price dynamics in 2024 was raised by 0.2 percentage points.

Nevertheless, the increase was not enough to give the single currency a boost. Yesterday, the euro fell by more than 0.5% against the dollar and breached the ceiling of 1.07. EUR/USD is at a crucial point, as it is threatening the May/June lows. A clear breach would increase the likelihood of an extension of the dollar's two-month rebound, which is unfavourable from the point of view of risky currencies, including the zloty, which is particularly sensitive following the ECB's September rate cut.

The fading economy in the past months has driven investors away from the euro. The new forecasts raise the inflation path less than market speculation had suggested. The opposite is true of GDP growth, which is expected to be 1% next year, not 1.5% as previously assumed. Currently, the eurozone is teetering on the brink of recession, and data from China strongly disappoints. The growth rate of the US economy against its competitors is impressive, as today's forecast-beating retail sales readings serve as a reminder. This is sufficient for the dollar to remain strong. Until there are reliable signs of economic strength in Europe, the perception of the euro and currencies such as the zloty will remain negative. A stronger weakening may be required to resume the downward trend of the US currency, which would force the Fed not to abandon plans for further hikes but even to start cutting rates soon.

14 Sept 2023 15:30|Bartosz Sawicki

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

7 Sept 2023 16:30

The zloty tumbles as central bank shocks with a huge rate cut

17 Aug 2023 8:58

EUR/USD drills lower as Fed signals more hikes (Daily analysis 17.08.2023)

11 Aug 2023 8:35

The US dollar loses steam amid soft data (Daily analysis 11.08.2023)

13 Jul 2023 9:38

The US dollar tumbles as inflation cools down (Daily analysis 13.07.2023)

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