Euro Recuperates as ECB Confirms Hawkish Bias

Posted Thursday, March 10, 2022 by
Skerdian Meta • 2 min read

The Euro has been bearish since summer last year, but in the last two months, the decline has accelerated, sending this pair down to 1.0810 on Monday. One of the reasons has been the FED turning hawkish, as inflation keeps surging, with the CPI (consume price index) in the US increasing to 7.9% in February. So, the FED is ahead of the ECB regarding tightening of the monetary policy.

The other factor sending the Euro down was the conflict in Ukraine, which increases the risks for the Eurozone. Market expectations about the ECB starting to hike interest rates abated, which weighed further on the Euro. But, the ECB is keeping its hawkish bias, despite the conflict, which has been giving the Euro a boost in recent sessions.

ECB Monetary Policy Decision – March 10, 2022

Deposit facility rate -0.50%
Main refinancing rate 0.00%
Marginal lending facility 0.25%

ECB revises schedule of APP purchases
APP purchases will end in Q3
APP volumes will be €30 billion in May and €20 billion in June
ECB stands ready to revise the schedule again if outlook changes
Any change in key rates will come sometime after APP purchases end, will be gradual
Full statement

There are a couple of minor changes to accompany the statement, namely that the ECB has dropped the wording that rates could be lower than they are currently. That is no surprise, considering that nobody is expecting a rate cut in any case. The forward guidance remains unchanged, but the more hawkish message is that they are have at least mentioned a timetable as to when they could be hiking rates.

By pinning Q3 as the timetable as to when APP purchases may end, we could see rate hikes follow shortly after or even in Q3 itself, if inflation pressures continue to be sustained in the months ahead. In doing so, they offer themselves some flexibility (the caveat being that they could change the schedule, depending on the data and outlook) but it also gives the market a rough idea of when rate hikes could follow. Adding to that, considering that rate hike bets were pared back in the past week, the Euro is also getting a lift, so they are able to stay away from any direct verbal intervention.