Selling the Fade in NZD/USD After the Jump Post ECB 50 bps Hike
The ECB raised main refinancing rate by 50 bps, the deposit rate by 0.25%, and marginal lending facility 0.75% vs 0.25% prior
The ECB raised interest rates more than the consensus today, with the Main Refinancing rate going up to 0.50% from 0.00% previously. Expectations were for a 25 bps (basis points) hike, but the ECB decided to surprise markets, raising all rates. The Euro rallied in the immediate aftermath of the ECB decision, focusing on the fact that the central bank decided to raise rates by more than expected. Odds between a 25 bps and 50 bps move were a coin flip coming into the decision, which explains the euro jump as punters on one side of the table take home the stakes.
There was also the announcement of the anti-fragmentation tool which is the TPI and the only real detail we got on that was that “purchases are not restricted ex-ante”. It is now up to Lagarde to try and bring that home but so far, bond spreads are not convinced as there are also Italian political risks in play at the moment.
NZD/USD Forming A Bearish Reversing Signal
Going back to the Euro, EUR/USD rallied from 1.0195 to a high of 1.0260 against the dollar. However, the optimism faded and the risk sentiment has faded as well. We decided to sell the jump in NZD/USD instead, after yesterday’s upside-down pin candlestick which is a bearish reversing signal.
ECB Interest Rate Decision
- Deposit facility rate 0.00% vs -0.25% expected
- Main refinancing rate 0.50% vs 0.25% expected
- Marginal lending facility 0.75% vs 0.25% prior
- Decision to raise by 50 bps is based on updated assessment of inflation risks
- ECB approves of Transmission Protection Instrument (TPI)
- Further normalisation of interest rates will be appropriate
- Frontloading strategy allows ECB to make a transition to a meeting-by-meeting approach
- The establishment of the TPI is necessary to support the effective transmission of monetary policy
- TPI can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy
- PEPP reinvestments remains the first line of defence to counter those risks though
- Full statement
NZD/USD Live Chart
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