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ECB MEETING: Dovish hike causes EUR/USD to drop further.

By Daniela Hathorn

12:43, 14 September 2023

Euro symbol at European Central Bank
Euro symbol at European Central Bank. Source: getty images

The European Central Bank (ECB) has hiked its three key interest rates by 25bps in September. Market-implied pricing prior to the meeting was 65% in favour of a hike, but there was a lot of uncertainty as to whether it would happen. The most recent data has shown signs of a lagging economy with consumer sentiment deteriorating, which raised fears that further rate hikes could damage growth even further.

Eurozone CPIEurozone CPI

But the ECB has decided to err on the side of keeping rates restrictive for as long as needed, to make sure inflation comes back down to its target level. But the takeaways from the policy statement give the feeling that this is a dovish hike, and there will likely be no more hikes in the immediate future. The following extract from Reuters’ coverage of the meeting makes that clear:

BASED ON ITS CURRENT ASSESSMENT, ECB CONSIDERS THAT INTEREST RATES HAVE REACHED LEVELS THAT, MAINTAINED FOR A SUFFICIENTLY LONG DURATION, WILL MAKE A SUBSTANTIAL CONTRIBUTION TO TIMELY RETURN OF INFLATION TO TARGET

The central bank has also pointed out that it remains data-dependent and will continue to monitor the economy, but it believes that the impact of previous tightening will start to become evident in inflationary measures. Because of the impact it will have on domestic demand, the central bank has lowered its growth projections for the next three years.

AUD/USD_zero

0.67 Price
-0.380% 1D Chg, %
Long position overnight fee -0.0066%
Short position overnight fee -0.0016%
Overnight fee time 21:00 (UTC)
Spread 0.00006

EUR/USD

1.09 Price
+0.030% 1D Chg, %
Long position overnight fee -0.0087%
Short position overnight fee 0.0005%
Overnight fee time 21:00 (UTC)
Spread 0.00006

USD/JPY

156.82 Price
-0.450% 1D Chg, %
Long position overnight fee 0.0108%
Short position overnight fee -0.0190%
Overnight fee time 21:00 (UTC)
Spread 0.010

GBP/USD

1.29 Price
+0.200% 1D Chg, %
Long position overnight fee -0.0046%
Short position overnight fee -0.0036%
Overnight fee time 21:00 (UTC)
Spread 0.00013

With regards to the Pandemic Emergency Purchase Programme (PEPP), the ECB intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024.

The euro saw a kneejerk reaction higher, but the move has faded and the currency is now trading mostly lower after assessing that the central bank seems to have been slightly reluctant to hike.

EUR/USD has been trading in a descending channel for seven weeks and has been struggling to break above the mid-line of the channel, currently around 1.0750. The path of least resistance continues to be firmly lower, but a break below the lower bound of the channel (1.0640) is needed to confirm continued bearish appetite – especially as the RSI is starting to venture into oversold territory.

EURUSD daily chartEURUSD daily chart

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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