Home Daily Commentaries Euro rallies after European Central Bank surprise

Euro rallies after European Central Bank surprise

Daily Currency Update

Yesterday we saw the Bank of England hike interest rates by a further 25bps, while also reducing the size of their balance sheet. The hike in rates comes as the Chancellor unveiled plans of a support package to help people up and down the country, after the announcement of a 54% rise in energy bills. Inflation is predicted to peak at 7.25% in April while averaging around 6% across 2022, which would make it the fastest price growth since 1991 and it is well above the 2% target set by the BoE. Though the 25bp hike was expected, what wasn’t expected was for 4 of 9 Monetary Policy Committee members to vote for a 50bp increase. This has sent out strong signals to the market that there may be a few more to come over the course of the year with two expected across the March and May meetings. After this was announced the pound immediately rose sharply vs both the EUR and the USD by about 0.4%.

Key Movers

The surprising story of yesterday was the European Central Bank suggesting that we could see a hike at some point this year. The meeting started with an unchanged monetary policy statement as expected, but this was soon followed by a press conference where ECB President Lagarde did not rule out the possibility of a rate hike before the year ends. Many believe that this will come in Q4 of 2022 while the ECB will likely also speed up the unwinding of the purchases made through their Asset Purchase Program.

The reason this was so surprising is due to the fact that the ECB have been amongst the most cautious of the world’s leading central banks in terms of tightening policy and hiking rates, in contrast with the BoE who hiked yesterday for the second time in two consecutive meetings, and the US Federal Reserve who are looking at a March hike.

After GBPEUR rising post BoE announcement to around 1.2065, the pair then completely reversed its course after the ECB press conference dropping over 1 cent to 1.1935 and has continued its descent since. This morning GBPEUR has been trading around the 1.1850 mark and vs the US dollar the euro climbed yesterday from 1.1280 to 1.1402. It has also been climbing slowly since with the pair just breaking through the 1.1450 mark.

The strong messages sent out by both central banks yesterday sent the dollar tumbling with the dollar index – a measure of the US dollar against a basket of other currencies – dropping below 95.50 for the day. The major talking point for the day ahead also comes from the US with the widely watched monthly official jobs report due this afternoon. Nonfarm payrolls are expected to rise by 150,000 across January which is a slowdown of around 50,000 after a gain of 200,000 in December. This could have an impact on the dollar so it’s one to keep an eye on.

Expected Ranges

  • GBP/USD: 1.3540 - 1.3625 ▲
  • GBP/EUR: 1.1905 - 1.1830 ▼
  • GBP/AUD: 1.9020 - 1.9105 ▲
  • EUR/USD: 1.1425 - 1.1495 ▲