Hawkish ECB Message Rocks MarketsThe December ECB meeting proved to be far from a muted event as markets were rocked yesterday by the bank’s outlook and guidance. The ECB delivered a widely expected .5% hike, despite hawkish risks, but it was the accompanying projections which were the main focus.Inflation Revised HigherCiting the need to drive inflation lower, the ECB warned that it would need to hike rates “significantly”. The warning came alongside sharp upward revisions to the bank’s inflation forecasts. The ECB now projects inflation to 8.4% in 2022, 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025.No PivotECB chief Lagarde was keen to drive home the bank’s hawkish outlook. In the press conference following the decision Lagarde explained that “One of the key messages, in addition to the hike, is the indication that not only will we raise interest rates further, which we had said before, but that today we judged that interest rates will still have to rise significantly, at a steady place.” Lagarde went on to warn against those with any expectation that the ECB will soon pivot, saying “Anybody who thinks this is a pivot for the ECB is wrong. We’re not pivoting, we’re not wavering, we are showing determination and resilience in continuing a journey.”QT To Step Up Regarding the bank’s asset purchase program, the ECB said that it will begin shrinking its balance sheet by 15 billion EUR per month from March and will announce further details in February.The uptick in ECB hawkishness at a time when many other central banks are pivoting (Fed, RBA, RBC) creates very tradable monetary policy divergence which favours EUR against those respective currencies near-term.Technical ViewsEURAUDThe rally in EUR this week has seen the pair breaking out above the 1.5713 resistance. With momentum studies bullish and with the retail market heavily short, the focus is on a continuation higher towards 1.6173 while 1.5713 holds as support.
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