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Euro Drops because Central Bank is More Dovish

by Didimax Team

As a result, the EUR/USD duo again failed to break through the 1.1100 threshold. Market participants' expectations were split between projections of a 50 or 25 basis point rate hike for today's ECB policy meeting. 

Unfortunately, the ECB ended up opting for a more miniature rate hike scale. That bank’s deposit rate rose from 3.00% to 3.25%.

Besides that, the marginal lending facility rose from 3.75% to 4.00%. Markets were also disappointed that the central bank had not committed any further rate hikes. 


ECB Won’t Pause the Rate Hike Cycle

The ECB has only stated that future interest rate changes will depend on economic data and future inflation expectations. The Board of Governors will continue to follow a data-driven approach to determine the appropriate level and duration of monetary tightening.

That statement was came from the ECB statement. The ECB's interest rate announcement triggered the fall of the euro in the forex market. The pace of its slump was briefly held back by the President of that bank, Christine Lagarde.

She stated that on a press conference held shortly after the rate announcement, but then fell again. Christine Lagarde insists the ECB will not pause its rate hike cycle.

Furthermore, she will not start cutting interest rates, as the risk of rising inflation is still quite high. She described her concern over the impact of stronger wage pressures on inflation going forward.

EUR/JPY was 1% Lower

That situation was occured while hinting at the need for further rate hikes. However, it did not specify a specific figure for the next rate hike projection. 

The EUR/USD was circulating in the 1.1030s at the time when this news was written. EUR/GBP plunged about 0.5% to its lowest level in a month. Meanwhile, EUR/JPY slumped by 1.0%.

That pair reached its lowest level this week. The United States dollar index was pressured to a low range of 101.06 in late trading on Wednesday and early trading on Thursday (3/May). 

The Federal Reserve raised their interest rates by 25 basis points, in line with market expectations. However, they also signaled that this represents the latest hike in the post-pandemic monetary tightening cycle.

Cumulative Tight Monetary Policy can be Applied 

The Federal Reserve has not stated explicitly that it will end its rate-hiking cycle. However, the change in their stance is seen in a number of sentence changes in its policy statement. 

They no longer "anticipate" further rate hikes, but will instead monitor future data. Besides that, the fed may consider "cumulative tight monetary policy" to determine "the extent to which additional policy tightening may be needed". 

The Fed's statement signaled a pause on further rate hikes, but its dovish stance was less assertive. Therefore, the US dollar "only" weakened limited in major currency pairs. 

Market participants are likely to consider upcoming economic data to make their next investment decisions, including Nonfarm Payroll (NFP) on Friday.

The Focus is to Monitor every Data

Some may expect an explicit pause for that rate hike cycle. However, Adam Button from ForexLive said that he doesn’t think it's realistic, but it's like now it's a pause in reality.

The focus now is to monitor economic data and try to find signals of weakness or strength in the US economy. Despite the greenback's reaction, the Fed's decision is actually quite wise.

It was as some American inflation data has started to show a slowdown. The banking turmoil has also resulted in tighter credit conditions, which could lead to a further economic slowdown this year. 

In addition, a pause on rate hikes will help the Federal Reserve "avoid" the political turmoil of the country's debt limit that is heating up ahead of next month's deadline.



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