Will the ECB continue with a 50bps hike as planned?

In the lead-up to the European Central Bank (ECB) interest rate decision this week, the market has seen significant turmoil. Firstly from the Silicon Valley Bank (SVB) failure, followed by the news that Credit Suisse’s largest financial backer is unlikely to provide further financial support. This led to Credit Suisse stock plunging by more than 28% and taking with it, the Eurozone bond yields and the Euro.

President Lagarde from the ECB had been signaling to the market, on multiple occasions, since the previous meeting that the ECB will hike rates by 50bps at the March meeting. However, with the current uncertainty especially with the banking failures seen in the US, the market has begun pricing in the possibility that the ECB hikes rates with more caution by deciding on 35bps rather than 50bps at the March meeting. This has led the EURUSD to reverse all recent gains, turning down from the 1.0750 price level to trade along the key support level of 1.0540.

If the ECB releases a decision to hike rates by less than 50bps, this would be a major red flag to the market and also indicate a slowdown in its path of monetary policy tightening, which could see the EURUSD continue with the current downward momentum. If the price breaks below the current support level and the interim price level of 1.0440, the EURUSD could see significant moves downside, supported by the cross-over of the MACD, with the next key support level at 1.0220, which was the previous swing low in November 2022.

Alternatively, if the ECB maintains its previous stance and decides to hike rates by 50bps at this meeting, the EURUSD could see brief relief. However, it would be unlikely that the price would reverse significantly, with the current market uncertainties likely to maintain the downward pressures and the 1.08 resistance level likely to hold firm.