EURUSD Drops amid Dovish ECB Decision

Earlier today, the ECB left rates unchanged. However, the central bank ended its asset-buying program. The Governing Council decided to end net asset purchases under its asset purchase program (APP) as of 1 July 2022. 

However, there were no hints at a possible quantitative tightening, i.e., selling bonds off its balance sheet, something the Fed has already announced.

"The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time"

Moreover, the ECB laid the ground for (only) a 25 bps rate hike in July. "Accordingly, and in line with the Governing Council's policy sequencing, the Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting."

Additionally, the ECB updated its inflation estimates much higher while lowering its growth expectations.

The new staff projections foresee annual inflation at 6.8% in 2022 before it is projected to decline to 3.5% in 2023 and 2.1% in 2024 - higher than in the March projections.

On the other hand, the European Central Bank has lowered its growth prediction for 2022 to 2.8% from 3.7%, and for 2023 to 2.1% from 2.8%. In addition, it has been revised to 2.1% from 1.6% for 2024.

Overall, the markets did not like today's event - a smaller than anticipated rate hike in July, rising inflation expectations along with lowering growth forecasts sent the EURUSD back into the downward channel as it traded 0.7% weaker on the day hovering near 1.0640.