• The ECB has announced a 50 bps rate hike, ditching guidance to fight inflation. 
  • EUR/USD has risen in response, but significant uncertainty remains.
  • The focus shifts to the Transmission Protection Instrument (TPI) – the anti-fragmentation tool – and its details.

Forward guidance ist kaput. Has Germany secured a big rate hike by agreeing to shore up Italian bonds? That may or may not be the case, but the European Central Bank has undoubtedly delivered a massive package. That is positive for the euro.

The old continent is rejuvenating – the ECB announced a 50 bps hike, double the standard 25 bps standard hike. It also differs from the ECB's guidance of a limited move. Forward guidance is irreleevant, wich means one certainty – more volatility in EUR/USD. It also means the ECB prefers doing the right thing, rather than sticking to the vauge notion of credibility. 

But, where will EUR/USD go next? That depends on the details of the Transmission Protection Instrument (TPI). It has been two years since the ECB presented a new acconym. The last one was the Pandemic Emergency Purchase Program (PEPP) – a flexible bond-buying scheme. The bank stopped expanding the use of PEPP back in March, but continues reinvesting proceeds from maturing bonds to keep soverign bond yields lower.

The next line of defense is TPI, and markets are eager to find out how big it is, and what it consists of. The bigger the package is, the lower the chance it is used,.The weaker it is, the lower the euro could go. 

Even if TPI includes printing fresh euros, I think it would be positive. The question of rising soverign yields has become acute. On the same day of the historic ECB rate hike – the first one in 11 years, or more than 4,000 days – Mario Draghi resigned as Italy's Prime Minister. The eurozone's third-largest economy has a 135% debt-to-GDP ratio and rising chacnes of a populist anti-European government. Draghi's depature is painful for the ECB, as he was the previous president and a succesful one.

Overall, the ECB has finally joined the rate hiking club, and has done it with a blast. It now depends on the TPI – that I will call "Operation Save Italy" – to see if the next EUR/USD is another leg higher, or a big downfall. 

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