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Summary: Despite the European Central Bank (ECB) raising interest rates by 25 basis points as scheduled, a minor shift in its policy statement triggered a sharp decline in the Euro. The EURUSD pair fell 0.70% intraday, currently trading at 1.1004. Traders have tempered their expectations for a September rate hike by the ECB.

Fundamental Outlook

As planned, the European Central Bank increased its three key interest rates by another 25 basis points, meeting market expectations. The main refinancing rate, marginal lending rate, and deposit rate now stand at 4.25%, 4.50%, and 3.75%, respectively, effective from August 2nd.

The ECB emphasized its continued concerns about inflation, stating that while inflation is expected to decline for the remainder of the year, it will still remain "above the target for an extended period." It also noted that while some indicators show signs of easing, "underlying inflation remains high overall."

The ECB reaffirmed its commitment to setting rates at a level "sufficiently restrictive" as long as necessary. It emphasized the Bank's continued reliance on a data-dependent strategy and added, "The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction."

Following the ECB's interest rate decision announcement, a minor shift triggered a sharp decline in the Euro. Traders have tempered their expectations for a September rate hike by the ECB.

In June this year, the ECB's governing council said future decisions would ensure that the ECB's key interest rates would rise to levels that are sufficiently restrictive to achieve the medium-term inflation target of 2% and would be kept at those levels for as long as necessary. However today, they reiterated that future decisions will ensure that interest rates will be set at sufficiently strict levels to achieve the medium-term inflation target of 2% as necessary. This subtle change in wording suggests they may have concluded the rate-hiking cycle.

The ECB faces a challenging balance as it aims to control inflation without stifling the Eurozone economy. However, this statement indicates that the ECB now has more confidence in policy rates reaching restrictive levels. They previously mentioned they would move rates to a stricter level, but now they state rates will be set at sufficiently strict levels. Therefore, the future policy focus may not be on further rate hikes but on keeping rates at higher levels for an extended period. For the market, this may signal the end of the rate-hiking cycle by the ECB, triggering Euro selling.

Technical Analysis

Prior to the ECB's policy announcement on Thursday morning, the EURUSD pair surged to the 1.1100 range, breaking out of the bearish channel in the four-hour chart. However, during the New York session, the EURUSD faced significant selling pressure around 1.1000. ECB President Christine Lagarde's dovish comments weakened the currency pair, suggesting a possible pause in rate hikes in September. Meanwhile, strong U.S. data led to a robust recovery of the U.S. dollar, exacerbating the selling of the currency pair.

The 50-day SMA proved congested for the bulls. It has proven difficult to surpass, and once the weekly low at 1.1020 is breached, the initial upside momentum will likely be reduced below 1.1000, opening the door for a near-term further decline. However, in the long term, as long as it remains above the 200-day SMA, the uptrend will remain intact.

Overall, after breaking below the previous lows, the EURUSD is expected to continue its downtrend in the coming trading days. In terms of trading strategy, it is recommended to go short at highs.

Trading Recommendations

Trading Direction: Short

Entry Price: 1.1050

Target Price: 1.0863

Stop Loss: 1.1175

Valid Until: 2023-08-10 23:55:00

Support: 1.0993, 1.0941, 1.0916

Resistance: 1.1054, 1.1091, 1.1148