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Euro Strengthens After ECB’s Big Rate Hike

On Thursday, the euro climbed against the US dollar amidst a choppy trading session, after a 50 basis points increase in the interest rate was delivered by the European Central Bank (ECB) for controlling inflation. This is the bank’s first hike in the interest rate after 2011.

Rate hike

The benchmark deposit rate of the ECB reached 0%, as the bank broker its own guidance for a rise of 25 basis points. The European Central Bank (ECB) also joined the list of its peers that have been increasing borrowing costs for quelling inflation in their own regions.

Market analysts said that this resounding opening showed that the central bank is quite flexible and more than willing to move past its own guidance. This makes it apparent that the Governing Council is now under the control of the monetary policy hawks.

Apart from the rate hike, the policymakers of the ECB also said that they would provide help to the more indebted countries that are part of the 19-country currency bloc, which also includes Italy. The bank said that its new bond purchase scheme was aimed at imposing a cap on the increase in borrowing costs, which would keep financial fragmentation under control.

The euro’s movements

The announcement from the ECB saw the euro rally, but the currency faltered a bit after Christine Lagarde, the President of the European Central Bank (ECB), stated they were speeding up their exit in terms of negative exchange rates but did not plan on changing their ultimate destination.

The euro recorded gains of 0.1% to reach $1.0198 after it rose to its highest value in two weeks of $1.0279. Market analysts said that they did not expect the rally in the euro to last for long because of the increasing risks of recession in the bloc.

Last week, the single currency had hit parity with the US dollar, which had last happened in 2002. However, it has managed to make a recovery since then because of the announcement that the Nord Stream 1 gas pipeline would resume its supply from Russia to Germany according to the schedule and expectations of a hawkish move from the ECB.

The flows from the gas pipeline had begun on Thursday, after shutting down for 10 days for its annual maintenance. The network regulator of Germany said that it had reached 40% capacity, which was where it was before maintenance started.

Italy’s fiasco

Apart from these events, the developments in Italy have also let to volatility in the currency. Prime Minister Mario Draghi’s government has fallen apart, which pushed him to resign. The uncertainty and turmoil have also hit financial markets.

Meanwhile, a 0.4% drop was recorded in the US dollar against the Japanese yen at 137.77. This was after the Bank of Japan stuck to its existing easy monetary policy and chose not to follow in the footsteps of other major global central banks. The British Pound also recorded a decline against the greenback by 0.04% to reach $1.1964.

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