EUR/USD Eyes Jumbo ECB Rate Hike as Recession Looms

Euro fundamentals: Neutral

• Euro sees best week since late May after less hawkish Fedspeak
• EUR/USD could see the most aggressive ECB tightening on record
• But important US economic data will also be vying for his attention

The euro gained about 1.4 percent against the US dollar last week, marking its best five-day period since late May. EUR/USD might thank less hawkish speeches by members of the Federal Reserve on Friday. This happened as policymakers entered a blackout period and provided some interesting commentary for the markets ahead of the next central bank interest rate announcement in November.

But that’s not for a few weeks. The focus for EUR/USD is on the European Central Bank, which sets interest rates on Thursday. As inflation continues to plague the eurozone, the ECB continues its most aggressive tightening cycle in history. Policymakers will raise the main refinancing rate and the deposit rate by 75 basis points to 2% and 1.5% respectively.

That’s largely priced in. Barring a surprise, the adjustments themselves are unlikely to do much to further affect the euro. All eyes will then be on what could be in store for December. Looking at market prices, the ECB is expected to hike rates by 50 basis points by the end of 2022. There is about a 50% chance that an additional 25 basis points could be raised.

So if ECB President Christine Lagarde keeps pushing the anti-inflation message, consolidation of another 75 basis point hike in December could bode well for the euro. Markets are also awaiting more details on when quantitative tightening might begin. However, it doesn’t seem likely that a specific date will be offered.

Policymakers are also pushing for tightening despite growing fears of a recession in the euro zone economy. Preliminary German GDP data for the third quarter will be released on Friday and is likely to show a significant slowdown from the second quarter. Meanwhile, German inflation data will also be on the lines. CPI is 10.1% yoy in October.

Euro traders should also pay attention to data out of the United States. Strong third quarter GDP pressure is expected on Thursday. The inflation indicator PCE core, which is preferred by the Fed, will follow on Friday. Therefore, the possibility of this data undermining the aforementioned less hawkish Fed language could boost the US dollar at the expense of market sentiment. The euro fundamental forecast thus remains neutral.

Fundamental euro drivers

Data Source – TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel use the comments section below or@ddubrovskyFXon twitter