The ECB preview Feb 2023:
the end of the ECB hike cycle?

Skilling Writers Team
2023-02-01
- ECB
- Trading

Next ECB interest rate decision - 13:15 GMT Thursday, February 2nd, 2023

Skilling ECB Preview

0.5% seems fully priced into markets already - EUR/USD has moved +940 pips (9.45%) during the last 90 days

The ECB has already indicated its 0.5% rate hike position for their February rate decision during previous market communications, so the markets have had plenty of time to “price in” this Thursday’s 0.5% rate hike.

Eurozone Key Indicators

ECB main refinancing interest rate up +25% since December 15, 2023
Eurozone inflation fell -7.36% (latest December 22)
The major European stock indices are up on average +29.5% last 90 days
EURO has strengthened +11.77% against the USD last 3 months

Since the ECB has already pre-announced a 0.5% hike for its February meeting, it's unlikely that there will be any policy surprise during Wednesday's meeting. Traders will most likely instead be on the lookout for any clues about what the ECB’s intentions will be for future rate decisions beyond March 2023.

Scenarios:

Expected outcome: ECB delivers the expected 0.5% hike, and the ECB committee indicates that the ECB will continue to hike into March 2023.

In this baseline case the EUR/USD could see some profit taking around the next resistance areas spotted within the 1.0930s to 1.0960s zone before retracing lower (correction move) from the January 06th - January 26th advance, and test the support area at 1.0760 (38.2% retracement from the 4 week high), before pushing higher towards the 1.12s - 1.14s.

Aggressive outcome: ECB hikes +0.5% and also indicates a 0.5% hike in March; ECB then mentions that the recent lower headline inflation (December) is good but that reaching their 2% inflation target is still a long way to go.

In this case, the EUR/USD could see a continuation of the multi-month advance without any major corrective move lower for a first target move towards 1.0960 - 1.1050s; the downside support to watch sits around 1.079.

Alternative (Low probability case): ECB hikes 0.5% and gives no hint that they will continue with another rate hike in March.

In this case, the corrective move could be triggered and move the EUR/USD lower for a test of the important 14-25 day support area near the 1.0760s and even the 1.0650s before consolidating.