EUR Plunges Dispite Rate Hikes

I'm currently on reservist and did not really monitor the markets. So I just came back from camp and I found that EUR had made a plunge! I thought that surely the ECB had kept rates instead of increasing them, but lo and behold! They did increase rates!

The Eur had been rising for the past few weeks in anticipation of rate hikes, and I believe many traders were expecting Eur to appreciate with the rate hikes as the ECB has expressed concerns over inflation. Other (technical) traders are looking at the charts see weakness (for me in the EURUSD pair) and were looking for shorting opportunities. I shorted the pair and was waiting for it to come down.... it stay up there for a couple of days before finally dropping dispite the rate hikes. Here's what some articles say about it.

Euro Plunges (Source: ForexNews)
The euro posted steep losses following ECB President Trichet’s press conference, falling by over two big figures to 1.5683. The European Central Bank, as expected, hiked rates by 25-basis points to 4.25%. However, the subsequent press conference by Bank President Trichet offered little hint as to whether any additional rate hikes can be anticipated. He said that, “The monetary policy stance following today’s decision will contribute to achieving our objective”, while emphasizing that the Bank has no bias on future decisions. Trichet said that rate increase was necessary adding that the Eurozone is experiencing moderate but ongoing growth. The economic releases from the Eurozone overnight were mixed, with retail sales sharply higher than anticipated while non-manufacturing PMI disappointed consensus estimates. Retail sales reversed from negative prior readings, increasing by 1.2% compared with -0.6% a month earlier and up 0.2% versus -2.9% in the previous year.Traders focused more on the less hawkish comments from Trichet, tempering expectations for additional policy tightening despite recent record high inflation reports. Accordingly, the euro plunged toward the 1.57-handle, with support seen at 1.5675, backed by 1.5640 and 1.56.

Euro Collapses as Trichet Proves to be a Big Disappoint (Source: DailyFX)
Thursday, 03 July 2008 21:50:53 GMT
Written by Kathy Lien, Chief Strategist

For the first time since 2007, the European Central Bank raised interest rates by 25bp to 4.25 percent. However despite this move, the Euro dropped more than 200 pips when ECB President Trichet failed to signal to the markets that interest rates would be increased again this year.

Going into the ECB meeting, the Euro rose to a high of 1.5910, indicating that currency traders were clearly banking on hawkish comments. Instead, Trichet played down the prospect of more rate hikes by saying he has “no bias” more than 5 times in the question and answer session with reporters. For Euro bulls, having no bias is just as bad as not having raised interest rates today. Despite strong retail sales, a sharp drop in the German unemployment rate and much stronger than expected producer prices, the ECB was surprisingly neutral. For a staunch inflation fighter, it is quite uncharacteristic to have no bias especially on a day when oil prices hit a new record high. German factory orders are due for release tomorrow. A strong rebound is expected but that may not have much of an impact on the Euro. We expect a bit more weakness before some stabilization in the EUR/USD.