Euro pares gains

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Euro pares gains

EUR/USD posted strong gains earlier but was unable to consolidate. In the European session, the euro is trading at 0.9885, up 0.01%.

The ECB’s delivered a jumbo rate hike of 75 basis points last week, bringing the benchmark rate to 2.0%. In just over three months, the ECB has tightened by some 200 basis points, its most aggressive hiking cycle ever. This represents a sea change in the ECB’s policy, as the central bank resisted tightening for months, even as inflation continued to rise well above the ECB’s 2% inflation target.

Eurozone inflation hits double-digits

Any hopes that a steep rate-tightening cycle would curb inflation have yet to be realized, as we have seen with the Fed, BoE and other major central banks. Inflation in the eurozone rose to a staggering 10.7% in October, up from 9.9% in September. At the same time, the eurozone economy is slowing – GDP in Q3 slowed to 0.2%, down sharply from 0.8% in the second quarter. With winter looming, the energy crisis is expected to worsen and the economy could shift into negative growth in the coming months.

The economic outlook remains uncertain, leaving in question what the ECB has in store at the December meeting. The head of the Dutch central bank Klaas Knot said on Sunday that even though a recession in the eurozone appears likely, he still favored an oversize rate hike of 50 or 75 bp, in order to tame inflation.

The Federal Reserve will announce its rate setting on Wednesday, and the markets have priced in a 75 bp move. This would bring the benchmark rate to 4.0%. The question on the minds of investors is what happens next? The last meeting of the year is on December 14^th and the Fed is expected to begin to ease its foot off the rate pedal, likely in the form of a 50-bp hike. This will depend on economic data, especially inflation. If inflation isn’t showing any signs of peaking, the Fed will have to consider another 75-bp hike.

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EUR/USD Technical

• EUR/USD is testing resistance at 0.9870. Next, there is resistance at 1.0108


• 0.9818 and 0.9669 are providing support

 

Source: Euro pares gains