The euro continues to strengthen against the US dollar as the European Central Bank meeting approaches, at which it is expected to decide on another significant increase in interest rates.
All the attention is focused on how high the stakes will eventually be raised. The second increase in a row by three-quarters of a point - an increase that seemed almost unthinkable earlier this year. But now, after the Federal Reserve has already raised rates three times by 0.75% at once, the European Central Bank will likely follow its path. Many investors and economists also wonder how high the ECB will eventually raise rates. The recession caused by the energy crisis threatens to engulf the eurozone, forcing households to struggle with rising heating and mortgage bills.
This may force the ECB and supporters of a more dovish approach to slow down with an increase in interest rates and an increase in the cost of borrowing. But some do not get tired of reminding about inflation, which is 10%, which is five times higher than the target of the Central Bank. Currently, analysts predict the peak of the deposit rate in March next year at 2.5%, after which its growth rate will decrease. Following the results of the two-day meeting, a decision may also be made on tougher conditions for providing cheap loans to banks, as well as on reducing the balance sheet of the European Central Bank, which totals trillions of euros.
In a recent study, the International Monetary Fund warned of a "toxic mix" of rapid inflation and slowing economic growth, predicting a winter recession in more than half of the 19 eurozone countries. At the same time, it argues that tight monetary policy will probably have to be maintained next year.
"The ECB should not give up too soon. We need to keep moving forward," Bundesbank President Joachim Nagel said last week. At the moment, money markets expect the cost of borrowing to exceed 3% in 2023 — a level that some ECB members consider reasonable and acceptable.
The forecast of the Central Bank of Spain shows that the maximum interest rate will range from 2.25% to 2.5%, which will help return inflation to the target of 2% in the medium term.
As noted above, betting will not be the only topic of discussion. Politicians may announce new, tougher conditions for long-term loans from TLTRO banks. Quantitative tightening — the process of getting rid of almost 5 trillion euros ($4.9 trillion) of bonds accumulated by the ECB, mainly during the recent crisis — can also be discussed. However, concrete actions are not yet expected. Last month, President Christine Lagarde told European lawmakers that QT would begin "in due course." At the moment, some officials are in favor of reducing the ECB's balance sheet, which will help in the fight against inflation expectations.
As for the technical picture of EURUSD, the bulls actively counterattacked on Friday, which led to a leveling of the situation. For further growth, it is necessary to return the pair above 0.9880, which will take the trading instrument to an area of 0.9920. However, the upward prospects will depend entirely on the data on activity in the eurozone and the United States. A break of 0.9830 will return pressure on the trading instrument and push the euro to a minimum of 0.9790, which will only worsen the situation of buyers of risky assets in the market. Having missed 0.9790, it will be possible to wait for the lows to update around 0.9750 and 0.9700.
As for the technical picture of GBPUSD, the pound strengthened its positions on Friday, reversing the pair's downward trend. Now buyers will focus on protecting the support of 1.1300 and breaking the resistance of 1.1380, limiting the upward potential of the pair. Only a breakthrough of 1.1380 will return the prospects for recovery to the area of 1.1490, after which it will be possible to talk about a sharper jerk of the pound up to the area of 1.1540 – a new monthly maximum. It is possible to talk about the return of pressure on the trading instrument after the bears take control of 1.1300. This will blow the bulls' positions and completely negate the prospects of the bull market observed since September 28. A break of 1.1300 will push GBPUSD back to 1.1220 and 1.1140.