The euro started the trading week on a higher note after the ECB President, Christine Lagarde, said that the central bank is ready to raise the rates during the summer. In a blog posted on the ECB’s website, Lagarde said that the lift-off date is drawing closer, and it is important for the markets to know the policy normalization path ahead.
Euro needed nothing more to rally. The EUR/USD, as seen below, jumped over 100 pips or more than 1% on the news. Traders now expect that the ECB will raise the key interest rate twice in July and once in September, bringing the deposit facility rate to zero.
ECB Prepares for the Ending of Negative Rates
It is a milestone for the ECB. The central bank has kept the interest rate below zero for many years, but now it fears that a weaker currency might add to inflation.
It is calculated that the euro depreciation since March 2022 alone could add another 10bp on inflation this year and 20bp in the year to come. Hence, the ECB wanted to make sure that the markets know it is not tolerating inflation much higher than its price stability definition.
As a consequence, the euro rallied across the board. It gained against all its peers, not only against the US dollar.
But the EUR/USD is the exchange rate that matters. To be able to gain against the dollar at a time when the Fed is hiking the rates aggressively is something to take into account by traders.
Euro traded as high as 1.23 against the dollar only twelve months ago. The rapid depreciation to below 1.04 worried the ECB, as it fuels higher inflation.
As such, the news that the central bank plans the normalization of its policy should not come as a surprise, despite the war in Ukraine. ECB has the mandate to deal with price stability, and the only way to do so is to raise the rates to combat inflation.
All in all, today’s news confirms that the ECB joined the hawkish camp. The big question in the months ahead would be if the summer rate hikes are all the ECB is willing to do, or some more await after September?
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