What is Going On Here?

The European Central Bank decided to make monitary policy more restrictive by increasing interest rates and the deposit rate.

This is during a time of sky high energy prices and an economy on the brink of recession. These restrictive policies will add more pressure to the different economies that make up the Euro zone. There are already analysts calling for a recession after this policy decision.

Normally, becoming more restrictive should increase demand in the regions currency. But the initial market reaction was very bearish for the Euro.

The chart below illustrates the markets bearish reaction to the rate decision. A selloff like this normally would not be expected from a restrictive policy stance.

If this bearishness holds then there are only two reasons to justify this Euro selloff.

Either investors believe this is the last interest rate hike, so they are selling the Euro in anticipation of less demand in the future. Or, investors believe this very restrictive monitary policy will push the Euro zone into a recession. Personally, these are the only two justifications I can see for the Euro selloff.

From a technical standpoint, you could have expected some selling near this long-term resistance level. Plus, the Euro has been in a very stron rally the past few months. Some profit taking should be expected as well.

The ECB president stated that they would keep policy as restrictive for as long as necessary to combat inflation. Honestly, I dont know if this is just a false selloff or not. This move in the Euro caught me off guard. But it doesn't look good so far for the Euro.

If this weakness in the Euro persists, then it will add strength to the dollar. Dollar strength adds pressure to equity markets. This is always something to keep in mind.

If investors truly believe this rate decision will lead to a recession in Europe, then we might see investors leaving the Euro equity markets and moving their capital to other assets. This is also something to keep in mind.

As always, this is not investment advice. Good luck trading. Be careful and be patient. Dont anticipate the market. Rather, participate in the market. Give your investments time. Don't be greedy. Don't invest in anything you don't understand. Don't put all of your eggs in one basket. Don't listen to the hype. Don't fomo or panic into or out of trades. Do your own due diligence. And just follow the trends. A trend is your friend.