Some market participants are now speculating the ECB could raise interest rates in the fourth quarter of 2022, temporarily strengthening the euro against other currencies.
The euro continues the rally that has formed since the announcement of the results of the ECB policy meeting yesterday. At the time of writing in the Asian session (4/February), EUR/USD has entered a two-week high in the 1.1470s range. Single Currency also beat the pound sterling, Japanese yen, and other major currencies.
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| EUR/USD Daily chart via TradingView |
The European central bank did not announce any policy changes yesterday. The benchmark interest rates for refinancing facilities, marginal loans, and deposits remain at 0.00%, 0.25% and -0.50%, respectively. The ECB further confirmed its plan last year to end its special pandemic bond purchase program (PEPP) in March. However, ECB President Christine Lagarde's press conference tore through the market's assumptions about the ECB's dovish stance.
In several post-meeting press conferences, Lagarde emphasized that an ECB rate hike is unlikely to materialize in the next few years. However, Lagarde yesterday refused to rule out the possibility of an ECB rate hike this year. On the podium, he actually said "we really need to maintain flexibility and optionality in the implementation of monetary policy".
Most analysts consider Lagarde's change in attitude to be significant, although an "ECB rate hike" remains unlikely this year. The reason is, since last year the market thought the ECB would be the most dovish central bank and even the "selling euro" action became one of the most popular trading ideas. This gap is what triggers many parties to close a number of their short positions, causing the euro to soar in the forex market.
“Lagarde opens the door for the start of a new cycle of monetary tightening by the ECB this year. The market has been pushing in that direction for a long time, but the fact that the president is acknowledging it is a big deal,” said Rodrigo Catrill, senior FX strategist at National Bank of Australia.
Some market participants now speculate that the ECB could raise interest rates in the fourth quarter of 2022. But some analysts believe that Lagarde is only taking steps to start tapering the APP (Asset Purchase Program) bond purchase program, instead of raising interest rates this year.
"In short, the ECB is now setting the stage for announcing a faster-than-expected tapering in Quantitative Easing, possibly (APP) ending in the third quarter, thus potentially paving the way for a rate hike in the fourth quarter," said Claus Vistesen, chief eurozone economist at Eurozone. Pantheon Macroeconomics, "Nevertheless, we still doubt the ECB will actually do so in the fourth quarter. We are now inclined to look forward to the first rate hike (ECB) in January 2023 by 20 basis points, followed by March and June (2023) respectively 10 basis points."
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