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Peter Davis

An writer at FOMOdrive

  • Jul 28, 2023
  • 2 min read

Euro collapses after ECB rate hike to highest since 2001

EUR/USD, eurusd financial chart down trend

After the European Central Bank (ECB) raised its interest rate, the euro experienced a sharp decline.

Strong data on GDP growth and orders for durable goods bolstered the dollar.

The euro dropped to a value of less than $1.10 for the first time since July 11.

It could be a record-breaking decline for the past 4.5 months.

On Thursday, the European Central Bank (ECB) raised its key rate by 25 basis points, as expected, to 4.25%. This was the ninth consecutive increase, the highest rate since August 2001, and the same level as October 2008.

The accompanying statement from the European Central Bank (ECB) noted that, while some inflation indicators have indicated a decrease, core inflation has generally stayed high. The ECB is determined to make sure that inflation returns to the goal of 2%.

At a press conference, Christine Lagarde, the head of the ECB, stated that domestic price pressure is becoming a significant contributor to inflation, with food and energy prices playing a major role.

She said that there is a chance of either a rate increase or a pause, but it is uncertain. When asked how much more needs to be done, she replied that she could not say at the moment. Furthermore, the European Central Bank has not yet discussed the option of shrinking its balance sheet.

Reuters reports that the decline in inflation in the Eurozone is happening too slowly, and there is a risk that the indicator may not reach the target of 2% until 2025.

Thanks to the resilience of consumers and businesses in the face of high interest rates, the US economy grew faster than anticipated in the second quarter.

An initial forecast of GDP for the second quarter revealed that the measure increased by 2.4% compared to the same period last year, following a 2% increase in the prior three months.

Economists had not anticipated the US economy to be in such good condition just a few months ago, yet here we are. A robust labor market, high consumer spending, and decreasing inflation have raised expectations that the US will be able to dodge a recession.

MUFG Bank anticipates that the dollar will experience further deterioration. If inflation persists in its deceleration in the upcoming months, the Federal Reserve will declare the termination of the rate increase cycle either at the Jackson Hole symposium in late August or at the September Federal Open Market Committee gathering.

Rabobank is of the opinion that the Fed will not reduce rates this year due to sustained inflation.

Nordea has suggested that the Federal Reserve may raise rates again as soon as September, depending on the data that is presented.

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