How Are Hawkish ECB Policies Shaping the Forex Market?

Early on Friday in European trading, the U.S. dollar significantly declined. Traders revised their expectations for rate hikes worldwide in response to the ECB’s hawkish remarks.

The Dollar Index measures the dollar’s value against six other currencies. It was trading 1.1% down at 108.585 at 03:15 ET (07:15 GMT), aiming for a 0.6% weekly decline after reaching a 20-year high of 110.79 earlier in the week. The market’s perception that the Federal Reserve would raise interest rates by 75 basis points at its next meeting in less than two weeks was largely confirmed by Federal Reserve chair Jerome Powell’s statement on Thursday that the central bank was “fully committed” to managing inflation.  His remarks were generally anticipated, though, and what turned the dial was the ECB’s very hawkish position.

How Much of a Change Should You Expect?

The European Central Bank prioritized the fight against inflation even though the union is probably on the verge of a winter recession on Thursday by raising its benchmark interest rates by an unprecedented 75 basis points and announcing more increases.

After the dollar’s lengthy gain, the hawkish posture precipitated a sudden wave of profit-taking. Some traders rushed to square up positions as it became evident that central banks other than the Fed were quickly hiking rates to control inflation. After touching a 20-year low of 0.9863 earlier in the week, EUR/USD rose 1% to 1.0091, solidly moving back towards parity.

As the 27-member EU gathers to debate its reaction to the local energy issue, traders are also paying attention to the meeting that will occur later on Friday. Alexander De Croo, the prime minister of Belgium, issued a warning on Thursday, stating that the energy crisis will lead to “de-industrialization and a serious risk of fundamental social discontent” in Europe.