EUR/USD Eyes Jumbo ECB Rate Hike as Recession Looms

Euro fundamental forecast: neutral

  • Euro sees best week since late May after less aggressive Fedspeak
  • EUR/USD may enjoy ECB’s most aggressive tightening on record
  • But, key US economic data will also compete for your attention.

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The euro gained about 1.4 percent against the US dollar last week, marking the best 5-day period since late May. EUR/USD could thank you Less aggressive speeches by Federal Reserve members on Friday. This came as policymakers entered a blackout period, giving markets some interesting commentary to digest until the central bank’s next interest rate announcement in November.

But, that’s not for another couple of weeks. The focus for EUR/USD turns to the European Central Bank setting interest rates on Thursday. With inflation continuing to ravage the eurozone, the ECB continues its most aggressive tightening cycle in its history. Policymakers should increase the Principal Refinancing Rate and the Deposit Facility Rate by 75 basis points to 2% and 1.5%, respectively.

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This is widely priced. Unsurprisingly, the adjustments themselves are likely to do little to further influence the euro. All eyes will be on what may be in store for December. Looking at market prices, the ECB is expected to raise rates by 50 basis points at the end of 2022. There is about a 50% chance that another 25 basis points could be added to that.

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As such, if ECB President Christine Lagarde continues to push the anti-inflation message, the consolidation of another 75 basis point rise in December could bode well for the euro. Markets are also eager for more details on when quantitative tightening might begin. Although, it doesn’t seem likely that a specific date can be offered.

Policymakers are also pushing with the tightening, despite growing fears of a recession in the eurozone economy. Preliminary third-quarter German GDP data will be released on Friday, likely showing a significant slowdown from the second quarter. Meanwhile, German inflation data will also cross the wires. CPI is seen at 10.1% y/y in October.

Euro traders should also pay attention to US data. A strong impression of third-quarter GDP is expected on Thursday. This will be followed by the Fed’s preferred inflation indicator, the core PCE, on Friday. As such, the possibility that this data could undermine the less aggressive Fedspeak seen earlier could offer the US Dollar a boost at the cost of market sentiment. This leaves the euro’s fundamental forecast neutral.

Euro Core Drivers

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Data Source – TradingView

— Written by Daniel Dubrovsky, Strategist at DailyFX.com

To get in touch with Daniel, use the comments section below or@ddubrovskyFXon twitter

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