Monthly Wrap: EUR – Euro rallies on persistently hawkish ECB

Key takeaways:

• ECB ignores external pressures and hikes interest rates by 50bps
• European banking crisis stokes volatility
• EUR monthly lows: £0.87, $1.05, AU$1.57, NZ$1.69, C$1.44
• EUR monthly highs: £0.89, $1.09, AU$1.62, NZ$1.74, C$1.49

The euro got off to a robust start in March as stronger-than-expected inflation releases from France, Spain and Germany, fuelled European Central Bank (ECB) interest rate expectations.

This was followed by some hawkish rhetoric from a number of ECB policymakers, which helped the single currency to extend its positive trajectory through the first half of February.

The euro then faced some headwinds as the European banking sector was plunged into crisis. Shares in Swiss banking giant Credit Suisse plummeted 30% to a new record low. This triggered a wider selloff of shares in other European banks and prompted EUR exchange rates to nosedive.

The banking crisis also overshadowed the ECB’s latest interest rate decision. Despite opting to raise interest rates by 50bps, the bank’s suggestion that further decisions would be data dependant dragged on the euro.

Fears of further financial sector chaos were then allayed as Swiss bank UBS acquired Credit Suisse, calming market jitters and lifting the euro.

The euro’s negative correlation with the US dollar saw the former climb further following a dovish interest rate decision from the Federal Reserve. Propelling the EUR/USD exchange rate to a new six-week high toward the end of March.

However, these gains were almost immediately reversed following a plunge in Deutsche Bank shares. Although the euro quickly bounced back as shares quickly stabilised again.

April could see the euro fluctuate wildly. The latest inflation data is expected to see headline CPI ease to 7.1%, down from 8.5%. The rapid slowing of inflation could temper interest rate hikes from the ECB, which could see the euro slide.

Looking further afield, EUR investors will be keeping a close eye on the banking sector. If any further weaknesses appear in the financial markets, volatility could return.