Euro turns lower after ECB delivered 50bps hike

As mentioned earlier, there was a great deal of uncertainty over whether the European Central Bank would opt for a 25- or 50-basis point rate hike today, which meant that the euro would move sharply based on the decision as the market was unsure.

Well, the euro surged higher after the ECB decided to hike the main deposit rate by 50 bp to zero, and introduced a new tool to counter “unwarranted, disorderly market dynamics.” But during the press conference, all of those gains evaporated.

The ECB has indicated that further normalisation of interest rates “will be appropriate.”

Some would argue that it was a bit careless on their part to hike by 50 bps given that their communication all this time was for 25 bps. But what really changed that decision was threefold:

First, the recent weakness of the euro meant that the eurozone was now importing more inflation than would have been the case had the single currency been stronger. This definitely encouraged the hawks to push for a 50 bp hike today.
Second, Eurozone CPI climbed to a fresh record high of 8.6% YoY in June, accelerating sharply from 8.1% in May. They simply cannot afford to just sit there and watch inflation continue to accelerate.
Third, all other central banks opted for larger increases than expected. The ECB had to surprise, otherwise the euro would have plunged – and they couldn’t risk that.

So, it was a case of common sense prevailing. Lagarde didn't try to put a bit of a dovish spin on that when she started the ECB press conference, although the euro lost all its previous gains when she was pressed about the new policy tool - Transmission Protection Instrument. .

At her press conference, President Lagarde confirmed that all countries will be eligible for TPI, and these are the four country criteria to be entitled:

1. Compliance with EU fiscal rules

2. Absence of severe macro imbalances

3. Fiscal/debt sustainability

4. Sound and sustainable macro policies

The ECB is now effectively deciding which country is fiscally solvent with sound policies. It is a dangerous territory to be stepping into. What about Italy? Will it be meeting these criteria? This may worry stock markets and send the major indices lower.

The EUR/USD rose along with the other euro pairs, most notably the EUR/JPY, before dropping during the ECB press conference.

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.