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ECB with a second increase but a more subdued tone, negative for the euro

The ECB said bond reinvestments under its asset purchase program would continue in full for as long as needed. Lagarde said policymakers would decide on the principles for reducing her portfolio in December, a commitment that follows the expectation of such a timetable. While its US and UK counterparts are acting to reduce the size of their balance sheet, the ECB is taking a different path and avoiding the path of quantitative tightening. A bigger priority for the ECB will be the trend in bond yield spreads between peripheral and core member states.

The euro fell and bonds rose as traders trimmed bets on future interest rate hikes after the European Central Bank struck a more dovish tone on its second hike in a row. Although the ECB said it expected to raise interest rates further, it took a slightly less hawkish tone. That prompted money markets to cut bets on a rate hike by as much as 27 basis points, peaking at 2.65% next year, down from almost 3% before the ECB’s announcement. Lagarde essentially concedes that stagflation risks are rising for the eurozone The euro fell below parity with the dollar and Italian debt went into positive territory after the decision, which took the deposit rate to 2.0%. Markets have been expecting an increase of this magnitude for weeks as policymakers try to bring record inflation under control.

FUNDAMENT

The interest rate differential at EUR/USD is in favor of the dollar in the medium term, the Eurozone also faces more serious difficulties as the government securities of the various members are traded heterogeneously and the countries on the periphery of Europe pay a much higher interest rate, the convergence with central Europe at this stage is slow and unsatisfactory. The war in Ukraine is also negative for the single currency and the fundamentals are in favor of the dollar in the medium term.

TECHNICAL ANALYSIS

The monthly chart shows the downward cycle of EUR/USD. The first resistance is in the area of 1.0460-1.0600. The trend line of the descending channel and the 65 MA are the critical points for a trend reversal, currently this is the area around 1.1700-1.2000.

An upward corrective movement is developing on the daily chart. The price broke the descending trend line of the last wave and closed above the 65MA. The upper part of the ascending price channel and the 100MA is the first resistance. The Sequential is about to be printed on the 9th, the Demarker oscillator enters the overbought zone. I expect the price to fail to cross this level and follow a downward movement. Support zone is the lower part of the corrective ascending channel and the broken trend line (0.9750 – 0.9850). A close of the price below the channel will mean the start of a new downward wave and new lows for this currency pair.

The expectations of the big banks for this week have the most coincidences in the upward direction at the level of 1.0170 and, respectively, in the downward direction of 0.9800.

In the longer term, banks now have two working scenarios for the currency pair. The bottom has either already been reached or there will be another sell-off this quarter, followed by a more substantial move to the upside in 2023.

ALTERNATIVE SCENARIO:

Crossing the price above the upper part of the ascending corrective channel and closing the daily basis above 100MA will mean that the upward movement is not completed and there is a potential to reach the resistance level 2 area around 1.0460 – 1.0600.


 Dealer Alexander Alexandrov

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