Pound Sterling trades lower after ECB announces 0.25% rate hike

By Forex Uy tín On Th5 4, 2023

Pound Sterling vs US Dollar pulls back from new 2023 highs after the European Central Bank's decision to raise interest rates by 0.25%.
GBP/USD rallied to new highs after the Federal Reserve's decision to lifted rates by by the same amount on Wednesday.
ECB's accompanying statement highlighted evidence of ongoing inflation in the Eurozone.
US Nonfarm Payrolls on Friday may increase market volatility further for Dollar pairs.

The Pound Sterling (GBP) trades just below new year-to-date highs of 1.2593 against the US Dollar (USD) after the European Central Bank (ECB) announces its monetary policy decision and releases its accompanying statement on Thursday. The Euro has reacted in a broadly bearish fashion to the news despite the ECB highlighting continued inflationary headwinds in the euro area and the need for continued efforts to keep them under control.

ECB President Christine Lagarde's press conference is currently underway could cause further unexpected volatility to Euro and US Dollar pairs and corsses if she hints at tighter policy to come. Friday's Nonfarm Payrolls (NFP) jobs report, could further inject volatility into GBP/USD if it misses expectations (bearish for USD, bullish for GBP/USD) or comes out substantially higher (bullish for USD, bearish for GBP/USD).

From a technical perspective, GBP/USD continues to edge higher within a range, which is part of a broader bullish trend that began at the September 2022 lows. Longs are, therefore, favored over shorts.

GBP/USD market movers

The European Central Bank (ECB) policy meeting announced a 25 bps rate hike to its main refinancing operations, marginal lending facility and the deposit facility, increasing them to 3.75%, 4% and 3.25%, respectively.
ECB accompany policy statement began with the following words: “The inflation outlook continues to be too high for too long.” This suggests the ECB will likely continue raising rates in the future in contrast to the Federal Reserve which has probably reached peak rate.
The Bank Lending Survey (BLS) for Q1 showed no outsized risks to Eurozone banks due to the crisis. The report did show credit conditions had tightened, however, but no more than in Q4.
Depositors in Europe cannot facilitate withdrawals and realocations into higher-yielding money market funds or other higher-interest-bearing vehicles as easily as in the US, suggesting the systemic risk is less this side of the Atlantic.
On Wednesday, the Federal Reserve meets market expectations for a 25 bps interest rate hike at its FOMC meeting on Wednesday, raising the Fed Funds Rate to a 5-5.25% range.
The accompanying statement drops wording that “some additional policy firming may be appropriate.”, suggesting this hiking cycle may be over and triggering a USD sell-off.
Powell mentions that labor market is “very tight” and that though supply and demand in the labor market are coming to a better balance overall, labor demand is above supply – a hawkish statement.
Powell mentions continued risks to financial stability and the effect of credit tightening but does not totally rule out the need for further hikes in the future, nevertheless, he says the change in the wording of the statement was “significant”.
Market guages of future rate hikes suggest a 95% probability of no future hikes from the Fed.
Meanwhile, GBP is underpinned by data for March which continued to show UK inflation above 10% for the seventh consecutive month.
This suggests the Bank of England (BoE) is far from done with hiking interest rates in the UK, and may have to hike more than once to get inflation back under control. If so, this is a medium-term bullish factor for Pound Sterling.
US Initial Jobless Claims, out at 12:30 GMT on Thursday may impact USD. The figure was 236K in the previous week, if it shows a rise it could weigh on USD but push Cable higher; if lower it could support USD and weigh on GBP/USD.
Friday sees the release of April Nonfarm Payrolls, expected to show the economy added 179K new jobs. A substantially higher-than-expected result could support USD and weigh on Cable and vice versa for a lower-than-expected print.

GBP/USD technical analysis: Sideways in an uptrend

GBP/USD hits new highs in the upper 1.25s after the FOMC policy decision but then backtracks lower. Nevertheless, the overall trend is bullish, thus, Pound Sterling longs are generally favored over shorts.

GBP/USD: Daily Chart

Given the dominant trend remains bullish price will probably continue breaking to fresh highs. A decisive break and close above the 1.2590 highs set on May 3, would likely lead to a continuation higher to the next key resistance level at circa 1.2680.

Decisive breaks are usually characterized by moves that begin with a strong green daily bar that breaks above the ceiling level or key high, with price closing near the highs of the day. Alternatively, three consecutive green bars above the ceiling level can also confirm breakouts. Such insignia provide confirmation that the break is not a ‘false break’ or bull trap.

The Relative Strength Index (RSI) is showing a bearish divergence with price although it is not acute enough to draw any conclusions. The RSI at the April 28 peak of 1.2583 was higher than it was at the 1.2590 May 3 peak, suggesting the most recent acsent lacked momentum. This is indicative of mild underlying weakness.

European Central Bank FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region.
The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa.
The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro.
QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

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