The European Central Bank (ECB) took decisive action and increased interest rates by 75 basis points last week in an aggressive effort to reduce inflation. The ECB only increased rates by 50 basis points in July of this year. The Central Bank wants to see how these two hikes affect the economy, so another substantial increase equivalent to the 75 bps move is improbable. Undoubtedly, there will be additional rate hikes in the future, but not all at once.
Europe’s economic issues in many ways resemble those that the United States is experiencing. Costs for food and gas are high, and energy concerns are on the rise as well. However, members of the ECB Governing Council anticipated a decline in energy and food prices over the coming months.
ECB President Lagarde is ready for anything
Even though ECB President, Christine Lagarde, shares pleasant thoughts with her counterparts, she is quoted as saying that she wants “all economic actors to understand that the ECB is serious about countering high inflation”. With a month-to-month view, Lagarde is being firm and following an assertive approach while not overreacting.
When speaking to reporters in Frankfurt, Lagarde stated, “If the data on our meeting-by-meeting exercise review suggests that we should take a high hike in our interest rates, we will do so.”
When reporters questioned her about the number of interest rate decisions that would be made, she responded, “It’s probably more than two, including this one, but it’s probably also going to be less than five.”
In the Russia-Ukraine confrontation, the EU is suffering more than the US. The shutdown of the Nord Stream 1 gas pipeline by Russia has put Europe in a tough and challenging situation. Electricity rates increased by 10% as soon as Russia announced the shutdown. 0.9% growth is currently projected by the ECB for consumer prices through the end of this year and into 2023.
EUR/USD Trading
A month-long war between bulls and bears has taken place in the battle of parity (1.00) between the Euro and the US Dollar, with the bears winning. However, the recent ECB interest rate hike might potentially work in the bulls’ favor.
Bullish traders just require a little push to gain momentum. We’ll have to wait and see if they want to push or proceed cautiously.
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