ECB and Fed Hike Rates by 0.25%

As expected, the US Federal Reserve and the European Central Bank have each raised their interest rates by 0.25% over the past day.

Less than 24 hours following the US Federal Reserve’s decision to raise interest rates by 0.25% to 5.50%, the European Central Bank also hiked its rate by 0.25%, to 4.25%. Both hikes were widely and strongly anticipated by market analysts.

It is the ninth consecutive rate hike since July 2022 by the European Central Bank, which had negative or flat rates at that point.

The ECB repeated in its monetary policy statement that rates will be kept at a restrictive level for as long as necessary to return inflation to below the 2% target. The ECB also stated that interest rate decisions would continue to be based on its assessment of the inflation outlook.

Despite these seemingly hawkish reiterations, a change in some of the language within the statement struck a more dovish note, leading to a moderate selloff in the Euro. The main Eurozone stock market index, the DAX, rose slightly.

The Euro had been rebounding in line with its long-term bullish trend. If the EUR/USD settles below the big round number at $1.1000, that would call this long-term trend into question.

Wednesday’s rate hike by the Fed was widely expected, with markets pricing in a 92% chance of a 25-basis points hike.

Fed Chair Jerome Powell made it clear that any further hikes would be “data dependent”, but also stated that “we’re going to need to hold policy at restrictive levels for some time”. Markets see this as likely to be the final hike within the current tightening cycle, meaning that it is now believed that the “terminal rate” has been reached. However, this is called into some doubt by stronger than expected US Advance GDP data which was just released (see below).

The Fed’s hike and statement triggered a rise in US stock markets and a minor selloff in the US Dollar, although the greenback has since regained this lost ground. The NASDAQ 100 Index was the major gainer of US equity indices.

Today’s release of advance US GDP data showed GDP increasing at a stronger pace than had been expected, at an annualized rate of 2.4%, higher than the 1.8% which was expected. This data sparked a fast rise in the USD as the unexpected strength of the US economy calls into question the expectation that the Fed’s terminal rate has already been reached.

Following the data release, the US Dollar Index strengthened by almost 0.50%, while US stock indices were only slightly higher.