Market Spotlight: EURAUD Explodes on Hawkish ECB

The European Central Bank hiked interest rates by 50bps to bring the deposit rate to 2%. This comes after 2 consecutive interest rate hikes of 75bps, though Christine Lagarde said that this is by no means a “pivot”. The central bank also indicated that there will be more interest rate increases to follow, at a measured pace, as inflation forecasts were revised higher. The ECB now sees inflation for 2022 at 8.4% vs a previous forecast of 8.1%.

Hawkish ECB Message Rocks Markets

On a 240-minute timeframe, EUR/AUD has formed a flag pattern near the breakout point of the double bottom. However, after Thursday‘s hawkish ECB meeting, the pair broke aggressively higher and is on its way to the double bottom target. In order to get there, it must first pass through horizontal resistance at 1.6069, then the year’s high at 1.6226. The target for flag formation is just above there, near 1.6280. However, if EUR/AUD fails to continue to move higher, the first support level is at the December 7th highs of 1.5749.

The December ECB meeting proved to be far from a muted event as markets were rocked yesterday by the banks outlook and guidance. The ECB delivered a widely expected .5% hike, despite hawkish risks, but it was the accompanying projections which were the main focus.

Inflation Revised Higher

Citing the need to drive inflation lower, the ECB warned that it would need to hike rates “significantly”. The warning came alongside sharp upward revisions to the banks inflation forecasts. The ECB now projects inflation to 8.4% in 2022, 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025.

No Pivot

ECB chief Lagarde was keen to drive home the bank‘s hawkish outlook. In the press conference following the decision Lagarde explained that “One of the key messages, in addition to the hike, is the indication that not only will we raise interest rates further, which we had said before, but that today we judged that interest rates will still have to rise significantly, at a steady place.” Lagarde went on to warn against those with any expectation that the ECB will soon pivot, saying “Anybody who thinks this is a pivot for the ECB is wrong. We’re not pivoting, were not wavering, we are showing determination and resilience in continuing a journey.”

QT To Step Up

Regarding the banks asset purchase program, the ECB said that it will begin shrinking its balance sheet by 15 billion EUR per month from March and will announce further details in February.

The uptick in ECB hawkishness at a time when many other central banks are pivoting (Fed, RBA, RBC) creates very tradable monetary policy divergence which favours EUR against those respective currencies near-term.

Technical Views

EURAUD

Current rally from 1.4281 should target 61.8% projection of 1.4281 to 1.5704 from 1.5271 at 1.6150. On the downside, below 1.5683 minor support will turn bias neutral and bring consolidations. With momentum studies bullish and with the retail market heavily short, the focus is on a continuation higher towards 1.6173 while 1.5713 holds as support.