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Euro slides as ECB slows the pace of rate hikes

Home >  Daily Market Digest >  Euro slides as ECB slows the pace of rate hikes

Written by:
Myrsini Giannouli

05 May 2023
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Important calendar events

  • JPY: Average Cash Earnings, Household Spending
  • EUR: German Factory Orders, French Industrial Production, French Preliminary Private Payrolls, French Trade Balance, Retail Sales
  • GBP: Construction PMI
  • USD: Average Hourly Earnings, Non-Farm Employment Change, Unemployment Rate, Consumer Credit, FOMC Financial Stability Report


The dollar continued to decline on Thursday after Wednesday’s Fed policy meeting, with the dollar index ranging from 101.0 to 101.3. US Treasury yields declined, with the US 10-year bond dropping below 3.35%. 

The Federal Reserve raised interest rates by 25 basis points at its monetary policy meeting on Wednesday, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%. 

The rate hike was fully anticipated, however, and had already been priced in by markets. Market attention was primarily focused on the FOMC statement and press conference for forward guidance. The FOMC statement released after the 2-day meeting was dovish, putting pressure on the dollar. The Fed omitted a line in previous statements about the likely need for additional rate increases. In addition, the FOMC statement contained a warning that the recent crisis in the Banking sector is ‘likely to weigh on economic activity’. At the press conference following the meeting, Federal Chair Jerome Powell stated that further actions will be data-driven, taking into account not only the direction of inflation but also economic conditions as well. 

Markets interpreted the Fed’s statement as a clear sign of a pause in rate hikes after May’s interest raise. The US Central Bank has signaled that its hawkish policy is coming to an end, as prolonged tightening is putting the economy at risk and the recent turmoil in the banking sector has increased recession concerns. Many analysts predict that there is a high probability of rate cuts starting in November, depending on economic conditions and inflationary pressures. 

US Unemployment Claims on Thursday went up to 242K, exceeding expectations of 239K. Preliminary Nonfarm Productivity contracted by 2.7% in the first quarter of the year versus a 1.7% decline predicted. Prelim Unit Labour Costs also went up by 6.3%. The labor data are connected to consumer inflation, indicating that price pressures in the US remain high.

ISM Services PMI data on Wednesday were in line with expectations and failed to provide much support for the dollar ahead of the Fed meeting later in the day. ISM Services PMI rose to 51.9 in April from 51.2 in March, remaining firmly above the threshold of 50 that denotes industry expansion. ADP Non-Farm Employment data on Wednesday were more optimistic than anticipated. The data showed that the number of employed people in non-farming industries in the US grew by 296K in April from 142K in March, against expectations of a 148K print.

Disappointing jobs data on Tuesday pushed the dollar down. JOLTS job openings tumbled to 9.59 million in March from 9.97 million in February, against expectations of 9.64 million. The drop in job openings is an indication that the labor market is softening after prolonged economic tightening. 

Advance GDP data last week for the first quarter of the year were mostly disappointing, pushing the dollar down. GDP data showed that the US economy expanded by 1.1% against expectations of 2% and a 2.6% growth in Q4 of 2022. Advance GDP Price Index on the other hand rose by 4.0% in Q1 of 2023, versus the 3.7% expected. This index is a measure of inflation and indicates that price pressures remain high. US Unemployment Claims on Thursday were more optimistic than anticipated at 230K, dropping below expectations of 247K.

Key inflation data released last week showed that US inflation rose slightly in March. The core PCE Price Index, which is the Fed’s preferred inflation gauge, rose by 0.3% in March, in line with expectations. On an annual basis, core PCE increased by 4.6%, beating expectations for a 4.5% growth. 

US Consumer Price Index went down to 5.0% year-on-year in March from 6.0% in February. Monthly CPI rose by just 0.1% in March, indicating that inflation cooled significantly from February’s 0.4% print. Core CPI, which excludes food and energy, was in line with expectations, rising by 0.4% every month. PPI data last week fell below expectations, strengthening the notion that inflationary pressures are easing. PPI in March dropped by 0.5%, against expectations of remaining the same as in February. 

Several important labor data are due on Friday for the US, including Average Hourly Earnings, Non-Farm Employment Change, and Unemployment Rate. The FOMC Financial Stability Report is also scheduled to be released on Friday and may cause volatility in dollar price in the wake of Wednesday’s Fed policy meeting.



The Euro slipped on Thursday as the ECB slowed the pace of rate hikes. EUR/USD dropped to 1.099 after the announcement of the ECB decision but pared some losses later in the day. If the currency pair goes up, it may encounter resistance near 1.109. If the EUR/USD pair declines, it may find support at 1.091. 

The ECB raised interest rates by 25 bp at its monetary policy meeting on Thursday, bringing its main refinancing rate to 3.75%. The interest rate increase was anticipated by markets and had already been priced in. The ECB had raised interest rates by 50 bp in previous meetings and is slowing down the pace of rate hikes. The Federal Reserve also raised interest rates by 25 basis points on Wednesday. The Fed’s benchmark interest rate, however, is much higher, in a target range of 5.00% to 5.25%. The divergence between the Fed’s and the ECB’s interest rates is putting the Euro at a disadvantage. 

The ECB left the door open for further rate hikes as inflationary pressures in the EU remain high. The ECB, however, is expected to reassess its policy direction ahead of its next meeting in June. EU policymakers must take a lot of variables into account, including the effect of economic tightening on the now fragile banking sector. 

Inflation data on Tuesday showed that price pressures in the Eurozone remain high. Headline inflation rose to 7.0% year-on-year in April from 6.9% in March, in line with expectations. Core CPI, which excludes food and energy, dropped slightly to 5.6% on an annual basis in April from 5.7% in March. Eurozone inflation is not showing signs of cooling despite the ECB’s aggressive tightening. 

Preliminary GDP Flash data released last week for the Eurozone were disappointing, putting pressure on the Euro. Flash GDP for the first quarter of the year rose to 0.1%, registering a small improvement against the 0 print for the final quarter of 2022. The print was lower than the consensus estimate of 0.2% growth, indicating very slow economic expansion in the EU. 

Several economic indicators are due on Friday for some of the Eurozone’s leading economies and for the EU as a whole. These may cause some volatility in Euro price in the wake of Thursday’s ECB decision. 

EURUSD 1hr chart



The Sterling gained strength against the dollar on Thursday and the GBP/USD pair rose to 1.260. If the GBP/USD rate goes up, it may encounter resistance near 1.266, while support may be found near 1.236. 

UK Final Services PMI data on Thursday were optimistic, rising to 55.9 in April from 54.9 in March. The PMI indicator remained firmly above the threshold of 50 indicating industry expansion. Mortgage Approvals went up by 52K in April from March’s 44K, indicating expansion in the housing sector. 

British headline inflation remained above the 10% level in March, dropping to 10.1% year-on-year from 10.5% in February. Even though inflation showed signs of cooling, it exceeded expectations of a 9.8% print. Price pressures remain high in the UK, forcing the BOE to continue its policy of economic tightening at the risk of economic recession.  

The BOE raised interest rates by 25 bp at its meeting in March, bringing the official bank rate to 4.25%. BOE is expected to continue hiking rates by 25-bp at its next policy meeting in May. Market odds are in favor of more BOE rate hikes up ahead. The BOE is not likely to pause rate hikes yet and many analysts predict no rate cuts at all within the year if inflation remains high.

The UK economy registered stagnation in March according to recent GDP data. Monthly GDP dropped to zero, falling below expectations of 0.1% expansion. In addition, the IMF has downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts.

The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.

GBPUSD 1hr chart



The Yen gained strength against the dollar on Thursday and USD/JPY declined, touching the 133.5 level. If the USD/JPY pair declines, it may find support near 133. If the pair climbs, it may find resistance at 138.1. 

Thursday was a Bank Holiday in Japan in observance of Greenery Day and no fundamentals were released. Monetary Base data released on Tuesday for Japan were pessimistic for the country’s economy, adding more pressure on the Yen. Monetary Base reflects the change in the total quantity of domestic currency in circulation and current account deposits held at the BOJ. The monetary base in April dropped by 1.7%, against a 1.0% drop in March and expectation of a 1.3% decline. 

The Yen lost strength last week after the BOJ decided to continue its dovish monetary policy. Last week’s monetary policy meeting was the first one with the newly-appointed BOJ Governor Kazuo Ueda at the helm. Kazuo Ueda has replaced Haruhiko Kuroda, whose term in office ended on April 9th, becoming the BOJ's 32nd governor. 

Japanese policymakers maintained ultra-low interest rates at the BOJ policy meeting on Friday, keeping the central bank’s refinancing rate at -0.10%. The BOJ interest rate decision was largely expected by markets and had already been priced in. The BOJ issued a statement that was more dovish than anticipated, however, putting pressure on the Yen. 

The BOJ modified its forward guidance slightly at last week’s meeting, by removing a pledge to keep interest rates at current or lower levels. In addition, the BOJ announced a review of the impact of its easing policies with a planned time frame of around one to one-and-a-half years. This signals a policy change down the road, although it is clear that the BOJ does not have any immediate plans to pivot to a more hawkish policy. On the other hand, the BOJ sent mixed messages to markets, by announcing that its Yield Curve Control Policy will remain unchanged. Many market participants were expecting a more hawkish forward guidance and the Yen plummeted. 

BOJ Core CPI rose to 2.9% in March on an annual basis from 2.7% in February. March’s print exceeded expectations of a 2.6% growth, indicating that price pressures in Japan continue to rise.

National Core CPI remained unchanged at 3.1% year-on-year in March. Tokyo Core CPI for April was hotter than expected, at 3.5% on an annual basis, against expectations of a 3.2% print. Inflation in Japan remains steadily above the BOJ’s 2% target, putting pressure on businesses and households. Increased price pressures and wages, raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy. 

Final GDP data for Q4 of 2022 have shown that the Japanese economy has reached stagnation. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy. The final GDP Price Index printed slightly higher than expected, with a 1.2% annual expansion, versus 1.1% predicted.

Average Cash Earnings and Household Spending data are scheduled to be released on Friday for Japan and may affect the Yen.

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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