In terms of EUR/USD, we have rallied into tomorrow’s ECB meeting but we see the rally as a sell. We expect a 25bps hike and a cautious ECB whereas many in the market expect a 50 bps hike…
On Thursday: European Central Bank policymakers will discuss whether to raise interest rates by a bigger-than-expected 50 basis points at their meeting on Thursday to tame record-high inflation, two sources with direct knowledge of the discussion told Reuters.・(Reuters)
The above would seem strange in that ECB President Lagarde has not indicated a 50 bps hike. If the Council was genuinely preparing for a 50bp hike, they would have started warning traders well before the rumor came out on Reuters
ECB To Raise Rates by 25 bps
The ECB will probably go for 25 bps in our view while Eurozone inflation hit 8.6% last month and is expected to keep rising into year-end before peaking. Higher interest rates are of limited use to curb inflation as it’s a supply problem NOT demand-driven. With the zone facing a recession, we don’t see the ECB moving rates aggressively higher. Also, the ECB has to be careful about Bond yields moving up too quickly in the poorer nations of the zone that can’t take higher borrowing costs.
According to Reuters sources, policymakers are also working on a deal to provide help for indebted countries like Italy on the bond market – provided they stick to European Commission rules on reforms and budget discipline. Let’s see what the ECB comes up with to help because it will be difficult within the ECB’s mandate to provide the support needed.
Euro Zone Heading for Recession
The zone is heading for a recession in our view and the energy situation will keep the ECB cautious on the rates front and how to implement the anti-fragmentation tool to help poorer nations such as Italy.
Energy uncertainty is complicating the ECB planned monetary normalization. Growth risks are skewed to the downside as winter approaches, and higher energy costs are driving inflation to record highs (HICP 8.6% YoY). Uncertainty is fostering a hesitant approach at the ECB, which is in sharp contrast to the Fed’s hawkishness. Differing policy guidance and reaction functions are driving a policy wedge between the US and the EU and contributing to euro weakness.・(SCOTIA BANK)
The Reality for the zone is a recession which could be even worse if gas supplies are totally cut off which we can see on the charts below.
EUR/USD has rallied on the prospect of a 50 bps hike and we don’t expect one the euro is in a big downtrend and the recent rally is just a correction of oversold.
We see limited upside and plenty of downside our views of the key technical support and resistance levels to look out for are on the chart below