In most cases, when the local central bank raises interest rates, it typically has a noticeable effect on the local currency's performance. However, in this particular situation, traders sent a very clear message that they lack confidence in the judgment of the policymakers. After the European Central Bank (ECB) increased interest rates to a historic high, the euro experienced a significant drop, reaching its lowest point in six months. The ECB, though, hinted that this might be the final step in its campaign of tightening monetary policy.
The EUR/USD pair dipped below $1.066 following the ECB's decision to raise interest rates to a record 4% at the end of the previous week. The decline continued even after European markets closed, with the euro falling by as much as 0.9% to reach $1.0632, a level not seen since March 20.
The European economy has been struggling, and another rate hike has only increased concerns about a potentially more severe slowdown in dealmaking and business activity on the continent. The euro's depreciation was not limited to the dollar; it was also evident against all other major developed world currencies.
Some analysts are forecasting that the currency could further depreciate to $1.05 in the coming weeks. This prediction is primarily based on the stronger economic performance of the United States. While the Federal Reserve considers additional rate hikes, Christine Lagarde, President of the ECB, indicated that the rate increase on Thursday should be "sufficient" since economic growth remains "slow and sluggish."
As the ECB hinted that it might be done with its cycle of interest rate hikes, the dollar index surged to a six-month high on Thursday. The dollar index was last up 0.64% at 105.41, just slightly below the earlier peak of 105.43, the highest level since March 9. The index appeared to be heading for its most significant one-day percentage gain in just over a week.
Current data from the United States suggests a resilient real economy despite the current interest rate settings. This resilience suggests the potential for further tightening measures from the Federal Reserve or a less aggressive easing approach compared to other central banks in 2024.
Since reaching its peak for the year in July, the euro has declined by more than 5%. This decline is attributed not only to the more favorable growth outlook in the United States, but also to rising commodity prices, which have a negative impact on Europe's terms of trade.
