LiveWire

The ECB did it. The European central bank hiked interest rates by 75 basis points, showing just how concerned policymakers are about inflation and how determined they are to retake control. The euro retreated in the minuted that followed the announcement.

German producer price index surprised to the upside, hitting another all-time high of 32.7%. The biggest contributor: energy prices, up 86% YoY, with the cost of gas (+141% YoY) being the main driver. The recent German inflation print leaves no choice for the European Central Bank to move on with its restrictive policy, even if economic activity is slowing down in the region. 

The euro fell 0.9% against the dollar, after data showed German activity unexpectedly contracted with PMI falling to 48, a level not seen since 25 months. The EURUSD rapidly dropped, trading just above its technical support around 1.0125, before finding some support. What worries investors is the decline in output was broad-based, with the downturn in manufacturing deepening and services activity contracting for the first time since December. Amongst the headwinds are China's Covid restrictions slowing down the global economy and the economic impact as a result of the war in Ukraine.

The European Central Bank hiked interest rates 0.5%, more than the 0.25% forecast, as it ends an era of record low rates. It will consider further normalisation of interest rates at the upcoming meetings, but does not restrict bond purchases. This is expected to put more pressure on sovereign yields and mortgage rates in the region. In the meantime, the ECB is regaining some of its credibility, helping the euro to find strength. At 1.0250 against the dollar, the euro is still far away from its technical resistance at 1.04. 

The pair EURUSD is on the rise (+0.6%, 1.0480) following the announcement of an ad hoc ECB Governing Council meeting on Wednesday to discuss current market conditions. A material jump above 1.05 might signal further upside potential.