The European Central Bank (ECB) announced earlier today that it had raised the key interest rates by 50bp, very much in line with market expectations. Because it is a slower rate hike than the previous one, one may say that the ECB is pivoting.
If yes, then this is a hawkish pivot because (almost) everything the ECB said today was hawkish to the core.
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More precisely, the ECB has given today very hawkish guidance. The substantial upward revision in the inflation outlook suggests that the central bank will raise the interest rates by another 50bp in February 2023.
Furthermore, the staff macroeconomic projections suggest that the economy will recover again in the coming years after declining in 2023.
A hawkish stance by the ECB
The market participants anticipated a 50bp rate hike from the ECB. However, they did not anticipate the extreme hawkishness that accompanied the rate hike.
First, the ECB views the upcoming recession as relatively short-lived and shallow. Second, the staff projections show large upward revisions to inflation, including the core one. Finally, the 2025 inflation is way above the ECB target, with the staff seeing the core one at 2.4%.
Also, risks are tilted to the upside.
EUR/USD breaks above 1.07
Naturally, the euro jumped on the ECB’s statement and press conference. The EUR/USD, for instance, traded above 1.07, a stunning reversal considering that only a couple of months ago, it was trading below 0.96.
But not only the EUR/USD advanced today. EUR/JPY is up 1%, EUR/GBP as well, and EUR/AUD rose close to 2%. Hence, the euro rallies across the dashboard.
Coming back to the EUR/USD, the technical picture looks bullish. The pair bottomed in October, together with the US equity market, and then rallied.
Recently, it formed a rising wedge formation. Typically, rising wedges are bearish patterns, but sometimes they act as continuation ones.
Whenever they act as continuation patterns, it means that the market has formed a running triangle – a bullish pattern calling for more upside. Therefore, one should not be surprised to see the EUR/USD taking out resistance at 1.08 sooner rather than later.
Source: https://invezz.com/news/2022/12/15/eur-usd-price-forecast-amid-the-ecbs-hawkish-pivot/