ECB rate decision expected, but was it the right decision?

[MongiIG]

While some are fearing that we are staring down the barrel of a loaded gun full of shot from the banking sector, the European Central Bank has gone ahead with a 50-basis point rate rise.

 Jeremy Naylor | Analyst, London | Publication date: Thursday 16 March 2023 

Some economists are concerned that with the current fragility of the banking system it may have been a better outcome to have halved the rate rise.

However, as IGTV’s Jeremy Naylor explains, this may have ended up with more questions than would otherwise have been the case, such as, "what does the European Central Bank (ECB) know that we do not?"

Questions aside, the baton has now been passed to the Federal Reserve (Fed) next Wednesday and the Bank of England (BoE) on Thursday.

 

ECB delivers as expected

So, despite the troubles brewing in the banking sector, the European Central Bank (ECB) has delivered what it promised it would deliver. And that is a 50-basis point (bp) increase in interest rates, thus sticking to its goal of fighting inflation despite the financial turmoil caused recently by US bank failures and worries on this side of Atlantic about what's going on with Credit Suisse.

Credit Suisse

The Credit Suisse issue has been sidelined for the moment because of the offer of what was effectively a blank check yesterday by the Swiss National Bank (SNB) for the Swiss lender. But that only goes so far. We've heard that 50 billion Swiss Francs worth of support has been taken by Credit Suisse and that is on a loan of course. So that has got to be paid back at some point. And if it has to be paid back, it's because the bank then becomes a success again. And we've seen a lot of troubles for this bank in particular, worries are that it could well see contagion.

Now, part of this banking crisis means that we've seen some of the central bank's jobs done for it in terms of the likely moves up in inflation, which would doubtless. Now, if there is any more upside it will be muted because of what we've been seeing from the banking sector.

DAX

Let me just bring up a chart of the German DAX. Because in today's session, we've seen a new lower low and we've been supported by this rising blue line here, which is the 100-period moving average just below where we are at the moment of 14,864.

Now, the point I want to make here is the fact that I think more than likely that we're going to get a trade that takes us down to this next line of support at 13,695. Now, a lot of water will have to pass under the bridge before we get to that point. But I don't see, technically, much here to support the markets on its way down, around about that, sort of we got this red line here, which is the 200-day moving average.

You got the MACD pointing low, which indicates to me that people are looking for reasons to sell this market, looking at price, good pricing to get in on a short trade on the German DAX.

As I said, the European Central Bank did what was expected of it and raised interest rates by 50-basis points. It really was a question of do it or suffer the consequences, I think more than anything else. If they had not done it, people would then be asking what the European Central Bank members know that we don't, about the outlook anyway, they delivered this and there's not much move on the European single currency at 106.

EUR/USD

Yesterday, we saw this pullback in the euro against that stronger US dollar as people looked out safe havens in this banking turmoil.

Since then, we have seen that support for Credit Suisse. So a little bit of interest in buying the euro/dollar. But I think really broadly speaking, this is the line to break if we see any more dollar strength, this one over 483 and then there's not much there to support it down to the 200-day moving average down here at 103 and a quarter. So there is potentially more downside to come for the euro against that stronger dollar if we see money going to the dollar as a safe haven.

So the consequences of the European Central Bank raising interest rates as expected. We see the new lower low for the German DAX and not much move for the euro single currency.