- The European Central Bank has raised rates by 25 bps, as most expected.
- Dovish hints in the statement were compensated by strong hawkish ECB press conference.
- ECB President Lagarde clarified that more hikes are coming, lifting the Euro, with more in store.
Doves are licking their wounds – contrary to previous decisions, they have ceded little ground in return for a slower pace of rate hikes. The "sufficiently restrictive rates" language in the European Central Bank's statement has the Euro higher. The Euro went down initially and for good reasons. But then came ECB President Christine Lagarde who made explicit hawkish comments in her Q&A session.
Here is what doves received in the statement:
1) Rate hikes have slowed to 25 bps: While that was expected, it comes just after the pledge to raise rates twice by 50 bps expires. The hawks only got what they were promised, but nothing more. Market participants expecting a bigger increase were disappointed.
2) Policy is "forcefully" transmitted: These comments about past hikes mean they are successful according to the ECB. There is no need to raise rates further – or at least not by much – due to this success.
3) No clear commitment about further hikes: The Frankfurt-based institution said that it will bring rates to levels "sufficiently restrictive," – but bringing them does not mean more hikes. If inflation falls below interest rates – or is seen as falling there – then there is no need to raise rates.
As mentioned above, President Lagarde turned things around. She waited for a question about the next moves to send clear explicit messages.
She emphasized that the ECB will bring interest rates to sufficiently restrictive levels. The ex-French politician also said that the hiking process is a "journey" and we are not there yet. And, she also said that the ECB has more ground to cover, and this is definitely not a pause.
Her comments are much more committal than the Fed's big hint about a pause. Unless a disaster happens, the ECB will keep raising rates, probably more than once. At the same time, barring any surge in inflation, the Fed is done hiking.
This divergence means more gains for EUR/USD – bulls can thank Lagarde for that.
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