EUR/USD eyes ECB rate decision

EUR/USD is in a holding pattern ahead of today’s ECB rate meeting. In the European session, the euro is trading at 1.0068, down 0.16%.

ECB projected to hike by 0.75%

The ECB holds its policy meeting later today, amidst difficult economic conditions in the eurozone. Inflation jumped to 9.9% in September, up sharply from 9.1%. The manufacturing and services sectors are in decline and confidence levels are low. The markets have priced in a 0.75% hike and there has even been talk of a jumbo full-point increase. Could the ECB surprise with a lower-than-expected hike of 0.50%? The Bank of Canada and Reserve Bank of Australia both delivered smaller hikes than expected at their October meetings, with increases of 0.50% and 0.25%, respectively.  The message from both central banks is that they are close to ending their rate-tightening cycles and expect inflation to peak in the next several months.

Will the ECB follow suit? It’s possible but unlikely. The ECB only entered the tightening game in July, and the current benchmark of 1.25% remains out-of-sync with inflation, which is close to double-digits and the ECB needs to be aggressive if it hopes to beat inflation. The benchmark rates are much higher in Canada (3.75%) and Australia (2.60%) and have slowed economic growth, while the ECB’s low benchmark rate has not had the same effect. Still, the weak eurozone economy could tip into recession as a result of sharp rate hikes, which means that a 0.50% hike cannot be completely discounted. We can expect some movement from EUR/USD in response to the ECB decision – an increase of 0.75% or 1.00% will be bullish for the currency, while a 0.50% hike would disappoint investors and likely send the euro lower.

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EUR/USD Technical

• There is resistance at 1.0095 and 1.0154
• 0.9924 and 0.9814 are the next support levels

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