The European Central Bank for the first time in 11 years has not only increased interest rates, but has also increased rates by double the expected hike. When a central bank increases interest rates it is normally deemed as a positive and can significantly support the value of the regional currency. In addition to this, economic theories also confirm that if the rate hike is higher than expected this is again deemed a positive.
But how did the Euro react after yesterday’s ECB announcement?
The Euro against most currencies had increased throughout both the Asian and European Sessions with traders anticipating the European Central Bank’s confirmation. When the announcement was made the Euro had originally shot up, increasing by 74 PIPs against the US Dollar and by 90 PIPs against the Japanese Yen. However, the price was quickly and decisively rejected by traders and rapidly declined back to the previous level. In some cases, it doppred to a lower point.
Some traders may ask why the market did not continue purchasing the Euro based on the news; this is something which the market is of course evaluating. This is also one of the reasons why it is important not only to follow fundamental analysis/market developments but also to analyze the price movement.
According to the ECB President, Ms Legarde, all members of the council agreed with the rate hike. The officials chose a more aggressive scenario, increasing the figure immediately by 50 basis percentage points instead of 25 percentage points now and then a further 25 points in September. The main interest rate is now 0.50%, the margin rate is 0.75%, and the deposit rate is 0%.
The results of the Italian government crisis may also be playing its part in the pricing of the Euro. Generally speaking, instability on the political level is known to lower investors confidence. Earlier this week the current Prime Minister Mr Draghi managed to gain the confidence of the Senate. Many of them still refused to take part in the vote, which convinced the official of the pointlessness of further attempts to save the coalition uniting the leading parties in Italy. As a result of the above the Italian Prime Minister once again resigned.
The Eurozone is now awaiting for the latest PMI reports which are due to be announced this morning. The latest PMI is also likely to significantly influence the market and the value of the euro.
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