ECB Benchmark Rate Reaches Record High, But Euro Could Continue to Crack Without Further Hikes

A record high in the ECB’s benchmark short-term rate has done little to stem the Euro’s ongoing slide against the US Dollar. The Euro’s recent weakness can likely be chalked up to persistently negative real rates in the Euro Area, while US real rates have risen into positive territory. The EUR/USD exchange rate slipped to a 6-month low this morning.

Following ten consecutive hikes, some have suggested the ECB has concluded its rate hike regime. However, President Christine Lagarde says it is not certain that a peak has been reached. Few signs of progress on reducing core inflation could keep the central bank hiking for months to come. If that is the case, the spread between US and Euro Area real rates could tighten, potentially stunting the momentum the Dollar has experienced against the Euro since July.

Related ETFs: Invesco CurrencyShares Euro Currency Trust (FXE), Invesco DB US Dollar Index Bullish Fund (UUP)

This morning, the European Central Bank (ECB) instituted a tenth consecutive rate hike, pushing the central bank’s Deposit Facility rate to 4.0%, the highest level since the Euro was launched in 1999. Headline CPI inflation in the Euro Area has been cut in half since reaching a record high of 10.6% in October 2022, but core inflation has remained stubbornly embedded, declining only slightly to 5.3% from a peak of 5.7% last March.

Though the ECB has kept their foot solidly on the brakes in a bid to slow inflation across the Euro Area, this has not translated any recent benefits to the Euro in relation to the US Dollar. Since the end of August 2022, the ECB has raised their benchmark short-term rate by 400bps, while the Fed has increased the upper limit of the Fed Funds rate by just 300bps. Though one central bank would appear to be hawkish than the other in terms of their rate policy, the Dollar has mounted a significant comeback against the Euro, cutting the EUR/USD exchange rate from…