Fundamental analysis

The euro is full of surprises

The unexpected expansion of the German economy by 0.3% q/q in the third quarter did not save the euro from falling. Bloomberg analysts expected to see a 0.2% reduction in German GDP due to the armed conflict in Ukraine and the related energy crisis, but the echoes of the exit from lockdowns and large-scale population support programs due to the pandemic allowed Berlin to surprise experts. Perhaps the fall in gas prices in October will make the picture even more joyful, but it’s too early to talk about breaking the downward trend in EURUSD.

Dynamics of European GDP and inflation

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European Central Bank President Christine Lagarde’s hints of a dovish reversal following the October ECB meeting and expectations that the Federal Reserve will remain resolute in the fight against inflation are to blame. From the text of the ECB’s accompanying statement, the affirmation that rates would rise at several subsequent meetings had disappeared, and the Frenchwoman talked a lot about the troubles of the eurozone economy and that the tightening of monetary policy was already having its effect.

The futures market lowered expectations of the deposit rate ceiling, European bond yields went down, and the euro weakened. In my opinion, after December +50 bps and February +25 bps, the ECB may stop. This implies an increase in the cost of borrowing to 2.25%, not 2.5%, as Bloomberg analysts and the futures market currently predict. Bad news for EURUSD.

However, the fate of the main currency pair will certainly be decided not in Europe, but in North America, where the Fed will meet next week. According to economists surveyed by Bloomberg, the central bank will bring the federal funds rate to 5%, which will provoke a recession in the US economy. The trajectory of the movement of borrowing costs is as follows: +75 bps in November, 50 bps in December and 25 bps at each of the next two meetings. Thus, it is longer than that of the ECB, which allows us to talk about maintaining the stability of the downward trend in EURUSD, at least until the end of the first quarter of 2023.

Dynamics of the federal funds rate

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Along with the FOMC meeting, the key event of the first week of November will be the release of data on the US labor market for October. It is expected that unemployment will rise from 3.5% to 3.6%, and employment – by 220,000. A very decent figure, given the fact that it takes +50-100,000 per month to cool the labor market and stable unemployment growth.

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If the US economy remains resilient amid strong employment, inflation will remain at elevated levels for longer than expected. Including due to an increase in wages by 5% or more. The Fed will need additional efforts in the process of tightening monetary policy, and this is good news for the US dollar.

Technically, a Dragon reversal pattern is forming on the EURUSD daily chart. The return of quotes to the Dragon’s head near 1.009 or the rebound from support at 0.9885 are reasons for buying. In the meantime, we remain in short-term sales from parity.

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


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