The Euro initially moved higher against the greenback in yesterday’s trading session before falling sharply after market participant interpreted the rate hike by the ECB as one of the last of the current rate hiking cycle.
As widely expected by the market, the European Central Bank lifted interest rates by another 50 basis points and noted there will be further interest rate increases as it seeks to battle inflation.
"The Governing Council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target," said the central bank in a statement.
However, investors were not buying this idea and predict next month could see the final rate hike in the current cycle when the ECB delivers a further 50 basis point rate rise.
The Euro entered February as 2023's second best performing currency as investors see the ECB pursuing an aggressive path of rate hikes which seems to be even tougher than the US Federal reserve who only delivered a 25-point hike recently.
But the Euro could be left vulnerable to serious losses if the ECB’s bold interest rate hikes are challenged, particularly as the pace of the Euro's recent advance leaves it is looking extended against some currencies.
Traders also believe the Fed will end their rate hiking cycle next month with a final 25-point hike but this is at odds with Fed president Jerome Powell who recently claimed that the US Central bank will keep the rate hiking program for as long as it takes to reign in Inflation and this will be dictated by economic data.
That is why all eyes will be on today’s release of the non-farm payrolls figure from the US later in the American session and if we see a strong round of figures, Powell might have just proved traders are jumping the gun about the end of the current rate hiking cycle.