Fundamental analysis

EUR/USD. ECB and US GDP: heading downwards again?

The European Central Bank following the results of the October meeting raised interest rates by 75 points. This decision was predictable, so the traders of the EUR/USD pair did not make any impression. Ahead of the October meeting, the pair was actively rising in price, but after the verdict was announced, it fell under a wave of short positions. At the same time, it cannot be said that the EUR/USD pair was growing, following the trading principle “buy the rumors, sell the facts”: the 75-point scenario was won back a few weeks ago, when the data on inflation in the eurozone were published. The euro-dollar pair strengthened its position this week, rather due to the weakening of the greenback. The ECB could hypothetically give impetus to the upward movement, but instead implemented the most expected scenario.

In addition to raising interest rates, the ECB announced that it would reinvest the main payments on maturing securities until at least the end of 2024. Also in an accompanying statement, the ECB confirmed that it “intends to continue raising rates further in order to ensure that inflation returns to the target level of two percent.”

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In general, the rhetoric of ECB President Christine Lagarde at the final press conference was “restrainedly optimistic” in nature. On the one hand, she predicted a further weakening of economic activity in the European region, adding that the likelihood of a recession in the economy has increased. On the other hand, Lagarde also voiced some positive messages. In particular, she said that a strong labor market is supporting wage growth, and supply disruptions are gradually easing. She also voiced a rather interesting phrase: “Economic obstacles may be exacerbated by interruptions in gas supplies. At the same time, many of our negative assumptions did not materialize in the end.” This phrase is interesting because the problematic “gas issue” in Europe seems to be resolved, at least in the context of the upcoming autumn-winter period. Thus, according to information published by Bloomberg, the volume of gas stored in Europe for the winter exceeded its needs – gas storage facilities in the region are almost full. According to the Association of Gas Infrastructure Operators, European gas storage facilities are on average 90% full, while those in Germany are nearly 98%. Therefore, the phrase of Lagarde should be considered through the prism of these circumstances.

Commenting on the ECB’s latest decision, Lagarde stressed that the central bank has not yet completed the process of normalizing monetary policy. According to her, the central bank will have to raise interest rates at the next few meetings in order for them to reach their target values.

Here it is necessary to recall that the head of the ECB at the previous September meeting limited the process of tightening monetary policy within the next six months. She said in September that the ECB would need “more than two but less than five meetings” to complete the process. Therefore, the hawkish scenario is calculated until April next year. Lagarde did not speak at the time about the pace of the rate hike, but added that a 75-point move “is not the norm” and the next hike “is not necessarily 75 basis points.”

As you can see, the continuing rise in inflation in the eurozone forced the ECB members to once again raise rates by the same amount. As for the further pace of the tightening of the monetary policy, here again – vague. Lagarde again repeated the thesis that the pace of rate hikes will be determined from meeting to meeting, depending on the incoming statistical data.

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Thus, at the October meeting, the ECB implemented the most anticipated 75-point scenario. The head of the central bank declared a further hawkish course (at least in the context of the next two or three meetings), but at the same time kept silent about the pace of tightening monetary policy (everything will depend on the dynamics of inflation and other macroeconomic indicators). In general, quite “tolerable” results for the euro.

Why, then, did the EUR/USD pair turn so sharply to the downside? In my opinion, the point here is not only in the trading principle “buy the rumors …”. The fact is that at the start of the US session, data on US GDP growth in the third quarter were published. Let me remind you that a negative result was recorded in the second quarter – the indicator decreased by 0.6%. In the third quarter, GDP increased by 2.6% (with a growth forecast of 2.3%). Representatives of the US Bureau of Economic Analysis, commenting on the release, noted that the growth of the country’s real GDP “reflects, in particular, an increase in exports, consumer spending, investment in non-residential fixed assets.” After a series of negatives (weak PMI indices, a decline in the consumer confidence index), dollar bulls were able to find a foothold.

Thus, despite the rather good (for the euro) results of the October ECB meeting, it is very risky to open longs for the EUR/USD pair using the decline. De facto, bulls were unable to gain a foothold above the parity level and are now balancing around the 1.0000 mark, after taking off to the 1.0090 mark. In my opinion, the tactics of opening short positions on corrective bursts are still relevant. The nearest bearish target in the medium term is 0.9900 (the Tenkan–sen line on the daily chart). The main target is 0.9810 (the Kijun-sen line coinciding with the average line of the Bollinger Bands on the same timeframe).

The material has been provided by InstaForex Company – www.instaforex.com


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