Euro slumps as ECB delivers dovish interest rate hike

The euro faced notable selling pressure on Thursday as markets reacted to the European Central Bank’s (ECB) latest interest rate decision.

Meanwhile, trade in the pound is mixed so far this morning, with GBP/EUR flat at €1.1657 and GBP/USD ticking up to $1.2428. GBP/CAD is buoyed at CA$1.6784, while GBP/AUD and GBP/NZD dip to AU$1.9229 and NZ$2.0967, respectively.

Coming up, will another strong US consumer sentiment index help to bolster the US dollar this afternoon?

What’s been happening?

The euro tumbled during yesterday’s session as the European Central Bank delivered its latest interest rate decision.

While the ECB surprised markets by raising interest rates by another 25bps to a new record high of 4.5%, EUR investors were disappointed as the bank signalled this is likely where rates will peak.

Applying further pressure to the euro were the ECB’s accompanying forecasts, as it downgraded its Eurozone growth expectations for 2023, 2024 and 2025.

The pound also struggled on Thursday amid growing concern over the UK’s economic outlook and fading Bank of England (BoE) rate hike bets.

The US dollar, on the other hand, rallied yesterday on the back of some positive US data. With the latest US retail sales, PPI and jobless claims releases all beating expectations.

What’s coming up?

The only data of note today will be the publication of the University of Michigan’s latest US consumer sentiment index.

Analysts expect the index to report a modest drop in consumer morale this month. But given it is still expected to be the third-highest reading of the past year, the release may still be positive for the US dollar.

Elsewhere, we are likely to see the fallout from the ECB’s interest rate decision continue to shape EUR exchange rates today. This may leave the euro vulnerable to further losses as EUR investors continue to digest what looks to be the bank’s last interest rate hike.

Meanwhile, in the continued absence of any UK data of note, the pound may be left at the mercy of market sentiment. A cautious mood could see Sterling weaken further.