EUR/USD Outlook Turns Bearish After ECB's Dovish Hike

 | Sep 14, 2023 20:32

Prior to today’s ECB meeting, there was a bit of uncertainty whether the ECB would hike or not, with markets pricing in a 65% implied probability of a 25-bps hike. In the end, it went ahead with the rate hike, lifting the main refinancing rate to 4.50% from 4.25% previously. But the euro nonetheless fell sharply. This is because the ECB strongly indicated that we have reached a terminal interest rate, meaning no more hikes are likely moving forward.h2 EUR/USD outlook bearish as rates at ‘sufficiently restrictive levels’/h2

As per the policy statement:

“[The] ECB considers that key rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target. Future decisions will ensure that the key rates will be set at sufficiently restrictive levels for as long as necessary.”

The ECB is clearly worried about the path of growth more than the inflation outlook. While rising oil prices may keep global inflation elevated, the ECB’s aggressive tightening is clearly impacting demand, as we have witnessed in recent data releases in Germany and the Eurozone. A weakening economy should ensure to bring inflation back down to the target in the medium term, especially when interest rates are now “at sufficiently restrictive levels.”

Accordingly, the ECB has cut its growth forecast for 2023 and 2024, while increasing its inflation projections slightly.

The ECB:

  • Cuts 2023 GDP growth from 0.9% to 0.7%
  • Cuts 2024 GDP growth from 1.5% to 1.0%
  • Raises 2023 Inflation to 5.6% from 5.4%
  • Raises 2024 Inflation to 3.2% from 3.0%

Moving forward, investors will be keeping a close eye on incoming data in order to gauge how long rates will be held at these levels. But until such a time that the trend of US data starts to deteriorate sufficiently enough to cause the dollar to reverse its bullish trend, the EUR/USD should remain in an overall a bearish trend.

h2 EUR/USD could break May low/h2

Thus, a break below the May low of 1.0635 still looks likely for the EUR/USD . Even if rates bounce back somewhat, I will maintain a bearish view on this pair until the charts tell us otherwise. Key resistance is seen around the 1.0765-75 area, which was previously support.

This area has held for now. The EUR/USD will need to reclaim this area in order to tip the balance back in the bulls favour slightly. But that won’t be enough without a higher high above 1.0945 for confirmation. On the downside, the next major target below the May 2023 low of 1.0635 is probably at 1.0500. But we will cross that bridge if and when we get there.