- For the second day in a row, the price of the euro currency pair EUR/USD is subjected to selling operations.
- As a result of which it moved towards the support level of 0.9755 at the time of writing the analysis.
- Its gains at the beginning of this week’s trading stopped at the level of 0.9875. Then I mentioned that the gains of the euro will be limited and subject to sale, as the dollar is still stronger.
At the same time, the euro is facing a severe energy crisis with the continuation of the Russian-Ukrainian war, which puts the course of the economic recovery of the eurozone at stake. When the European Central Bank meets again next week, the hawks seem to have convinced the few remaining doves of the need to go ahead with another rate hike. And unlike the periods prior to the July and September meetings, there was no public debate about the size of the rate hike.
The economic backdrop for next week's meeting was hardly changed from September. Confidence indicators continued to decline, while the hard data pointed to a very mild contraction in the Eurozone economy in the third quarter. If anything, the ECB's growth forecast for September that already looked very optimistic six weeks ago is becoming less likely. The outlook for the Eurozone economy is surrounded by a very high degree of uncertainty. Careful passing of higher energy and commodity prices to growth and inflation and precise fiscal policy reactions are crucial, but they are also very unclear determinants of Eurozone growth and inflation in the coming months.
At the current stage, the European Central Bank has turned a blind eye to recession risks but is firmly determined to lower inflation and inflation expectations. To that end, it is hard to see how the ECB cannot move again by 75 basis points at next week's meeting. With a 75-basis point rate hike looking like a done deal, all eyes will also be on other more open issues: excess liquidity, quantitative tightening and eventual interest rate. In terms of quantitative tightening, we believe the markets have outdone themselves.
Even if the discussion had begun in the European Central Bank, with current financial stability risks, recent British experience and uncertain macro-outlook, QT is still somewhat off. Christine Lagarde has stated several times that interest rates must first be brought back to normal or neutral levels before any QT can begin. Prefer any QT to be an end to reinvestments rather than actively selling bonds. As we still see the end of the ECB's rate-raising cycle in the first quarter of next year, the phase-out of reinvestment under the Asset Purchase Program (APP) could begin in the spring of 2023, at the earliest.
Regarding the final interest rate level, French Central Bank Governor Francois Villeroy de Gallo said in an interview with the Financial Times that the ECB could "quickly go" to a deposit rate of 2% by the end of the year. ECB Chief Economist Philip Lane made similar comments, noting that the ECB currently sees the neutral rate slightly above the common range of 1% and 2%. We don't expect a clear call on where the final interest rate will be.
EUR/USD Forecast
The latest performance confirms the extent of the bears’ control over the direction of the EUR/USD currency pair. According to the performance on the daily chart below, the breach of the 0.9720 support level will be important for more bearish momentum, and the technical indicators will not move towards oversold levels for the same time period without breaking the 0.9660 support level.
On the other hand, and as I mentioned before, there will be no break for the bearish trend without stability above the psychological resistance 1.0000 again. The euro-dollar will be affected today by the announcement of the German producer price index reading along with the US economic data, the weekly jobless claims, the Philadelphia industrial index and the US existing home sales.
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