• The ECB has raised rates by 75 bps, at the top end of market expectations.
  • No recession is on the horizon according to the bank's forecasts. 
  • Hawkish stance contrasts growing fears for an energy-led slump.
  • EUR/USD may slide once growth fears take over

Great effort – I can hear market participants saying while clapping their hands. The European Central Bank has done its best to sound hawkish, lower inflation also by keeping the euro afloat. The effort is there, but the outcome is in doubt.

ECB President Christine Lagarde oversaw a unanimous decision to raise rates by a triple-dose, 75-bps rate hike to combat rising prices. It took advantage of a still-strong economy and rising wages to act now. The borrowing cost increase was mostly expected, but still fell at the upper end of expectations. Some foresaw a 50-bps hike. 

However, Lagarde took some of the sting out of the the hawkish move by refusing to commit to another 75 bps hike in October. She went further and said such moves are not the norm. That is one point where the hawkishness has come off.

The second attempt to convey a determined message to fight inflation came from the ECB staff. It forecast higher inflation and slower growth, but still foresees growth in 2023. That 0.9% expansion rate raised eyebrows, especially as the Bank of England sees the UK economy slumping throughout next year. 

The big elephant in the room is the Russian bear – Gazprom's shutdown of gas flows via Nord Stream has sent energy prices soaring. President Vladmir Putin's war in Ukraine is stalled and is unlikely to end soon. Finding alternative sources of energy will also take a long time – renewables and LNG projects may only have an impact in 2024. 

In the meantime, high energy costs mean less money in Europeans' pockets – the ECB knows it, and Lagarde said it could be recessionary. That also weighs on the euro. Moreover, she revealed that in a downside scenario,the bank does see a recession in 2023

All in all, the ECB seemed to be frontloading – a word Lagarde used repeatedly – of rate hikes. That means fewer ones are coming later, with or without further energy crunches. 

EUR/USD

Best efforts to keep the euro afloat have been enough to keep EUR/USD clinging to parity. Will it send the common currency higher? I think the pair is set to resume its falls. 

While Lagarde made her attempt to sound hawkish, her peer Jerome Powell, Chair of the Federal Reserve, vowed to fight inflation, whatever the costs and political pressures, and the sooner the better. His message is more convincing – and America's economic situation is better – adding to potential EUR/USD pain. 

Last note: it is hard to see the euro rising when Lagarde also said that the ECB "will probably hike at less than five more meetings." Putting a time limit on hikes is unhelpful for the currency. It also shows the bank is only taking advantage of its narrowing window to raise rates.

That window could close sooner rather than later – winter is coming and Russian bears are ready to leave their caves

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