Next ECB move?

European Central Bank policymakers may slow interest rate hikes. With four weeks to go on December 15, the ECB’s last meeting of the year, officials still have plenty of time to decide on the exact increase.

According to people familiar with the matter, who declined to be identified because the Governing Council’s deliberations are private, initial discussions suggest a lack of momentum for another 75 basis point hike at this time. Barring another surprise spike in inflation, the consensus may be in favor of a less aggressive step. Among the reasons cited are rising risks of a recession, the possibility that pressures on consumer prices will ease and the prospect that a half-point move in the deposit rate to 2% would reach near the so-called neutral level, which no longer stimulates the economy. The need to discuss starting a balance sheet reduction was also cited.

Austrian central bank governor Robert Holzmann — previously a supporter of more aggressive hikes — hasn’t said much about the size of the next hike, nor has Germany’s Bundesbank president Joachim Nagel.

Their Estonian and Latvian counterparts, the region with the highest inflation in the eurozone, have indicated 50 and 75 basis points as possibilities, without yet expressing a preference.

French central bank chief Francois Villeroy de Gallo predicted on Wednesday that the ECB would likely hike to a “normalization range” of around 2% next month, remarks that could also point to 50 basis points.

The next inflation reading, expected on November 30, will be “relevant” to the December decision, both as an indicator of price pressures and as a number to feed into quarterly forecasts, ECB Vice President Luis de Guindos said . However, at 10.6% in the euro area – according to new data published on Thursday – inflation remains a record in the history of the single currency. Guindos warned that it would remain “elevated” in the first half of 2023. The next Governing Council meeting will coincide with the release of inflation data on November 30.

EUR/USD daily

The currency pair is in a downward trend correction. There is development of a potential reverse H&S formation. Currently, however, the price has reached the 200MA area and the 50% fibo of the last wave. Sequnetial has printed a 9 and the DeMarker oscillator is deep in the oversold zone – these factors suggest that there may be a move to the downside. This move has the potential to form the right arm of an inverse H&S formation. The support zone is around the levels 0.9950 – 1.0100.

The expectations of the major investment banks are that the bottom has already been reached and the Euro will rise smoothly next year. The average values of the expectations are that the currency pair will be around current levels by the end of 2023.

For Q2 of 2023 most matches of expectations are in the zone of 1.0 and 1.0200.

 Dealer Radoslav Valov

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