FX.co ★ On the sidelines of the ECB, there is active talk of another 0.75% rate hike in October

The euro still managed to regain its position against the US dollar and stay above parity after the European Central Bank raised its key interest rate by 0.75% yesterday. But this was not the main reason for the increased demand for risky assets. According to rumors, representatives of the European Central Bank are ready to announce another large-scale interest rate increase at their October meeting, but on the condition that the inflation data will require such changes.

The second consecutive increase of 75 basis points will correspond to the actions of the Federal Reserve System, which continues to tighten monetary policy at an aggressive pace, sacrificing the economy as inflation remains at 40-year highs.

With yesterday's hike, the ECB joins more than 40 central banks that have raised interest rates by at least three-quarters of a point at a time. It is much more interesting that the appetite for a potential further tightening of monetary policy in October is shared by both hawkish ECB policymakers, including representatives of Germany, and those who adhere to a more dovish approach in the Governing Council.

As for the decision related to the reduction of the balance sheet of the European Central Bank, which has almost 5 trillion euros of bonds bought by the ECB during recent crises, it is expected that the reduction of the program will be discussed at an off-policy meeting of officials in Cyprus on October 5.

According to forecasts by several economists, if the September increase does not have a strong impact on economic realities and financial stability persists, the Governing Council will probably raise the rate by 75 basis points again next month. Then the rates will increase by 50 basis points in December and another 25 basis points in February, but the increase will affect only the deposit rate.

From the statements made by ECB President Christine Lagarde, it is also obvious that she expects more than two aggressive interest rate hikes, followed by three more increases that will be milder.

Against this background, investors increased their expectations for further tightening the ECB's policy, while the bets that the regulator will go for another increase by 75 basis points in October reached 40%. This is a rather sharp reversal of politicians after accusations were poured into the ECB that the regulator was too slow to react to inflation, which began when the COVID blockages ended and worsened when the military conflict between Russia and Ukraine began.

Whatever the trajectory of interest rates, further decisions, as is the case in most countries, will be made against the background of growing fears about a recession in the eurozone. The ECB's new quarterly forecasts indicate faster price growth and a slower economic recovery. The forecast of economic growth for the next year was lowered to 0.9%. Even Lagarde said that supply-side problems stimulate inflation in Europe, which last month exceeded 9.1%, reaching another historic high, almost five times higher than the target level of 2.0%. "It was necessary to take decisive measures, and we did them," she said. "Inflation remains too high."

As for the technical picture of EURUSD, yesterday's decisions changed it. Trading is already above parity, which creates some prerequisites for further recovery of the trading instrument. In the event of a decline in the pair, the bulls need to cling to 1.0000 with all their might, since by missing this level back, they can say goodbye to hopes for a larger recovery of the pair. Currently, the nearest target of buyers is the resistance of 1.0110. Its breakthrough will give buyers of risky assets confidence, opening a direct road to 1.0190 and 1.0240. The farthest target will be the 1.0270 level. In the event of a decline in the euro and a breakthrough in the parity of the euro against the dollar, buyers will certainly show something around 0.9940. But, having missed this level, the pressure on the pair will only increase, strengthening the bear market, which can push the trading instrument to the lows of 0.9880 and 0.9810.

Meanwhile, the pound continues to fight for the 16th figure, and today we may see a breakdown of this range. This will create a chance for a larger upward correction, opening a direct road to the highs of 1.1650 and 1.1690. The farthest target in the current bullish movement will be the 1.1755 area. If the pressure on the pair returns, buyers now need to do everything to stay above 1.1560. Without doing this, you can see another large sale to the level of 1.1510. Its breakdown will provide a direct road to 1.1460 and 1.1406.