Dovish hike by ECB, BoE next?

Market reports
Thanim Islam
  • ECB hint the end of hiking rates
  • Markets price in similar move by BoE next week
  • US consumer spending adds to growth story



As far as the market is concerned, the ECB conducted their final rate hike in their cycle by raising rates to 4%. The key line which indicates the Bank will not hike rates any further was “based on its current assessment, the Governing Council considers that the key ECB interest 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”. The EUR gained initially on the hike but these were short lived and the EUR weakened across the board. Bets on interest rate cuts by the ECB next summer are now being priced in. With interest rates no longer supporting the currency and the Bank downgrading growth forecasts, the outlook for the EUR going forward continues to look negative.

As a consequence of the ECB’s actions yesterday, markets are now raising their expectations that next week's hike by the Bank of England will be the last as well. GBP was also a loser on the day.

US retail sales came in much stronger, once again illustrating the respective strength of the US economy. Producer price inflation also came in higher and as a result, USD gained with the 2023 highs on the USD Index now in the crossfires of the market. GBPUSD and EURUSD traded to fresh 3-month lows.


Market rates

* Daily move - against G10 rates at 7:30am, 15.09.23

** Indicative rates - interbank rates at 7:30am, 15.09.23

Data points


EUR: ECB Lagarde

Our thoughts

It's all about growth for FX markets now with interest rate hikes slowly coming to an end. And in this space, it seems that USD is the one that will benefit the most. On GBPUSD and EURUSD we broke through two key support levels and now it seems that GBPUSD is going to head toward the May lows and EURUSD towards the lows seen in March before we see any major correction on the pair. USD sellers would do very well to sell near these levels should they materialise.

Chart of the day

GBPUSD has declined over 5% since peaking in July, and since breaking the year-long uptrend in August, we can clearly see that we are now in a downtrend. The 200-day moving average should have acted as support for GBP but yesterday we even saw a break of this key level suggesting that more weakness could also come on the pair. A move towards the May 2023 lows could be seen before we see a retracement higher.

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