The central bank bonanza continues with the ECB in focus today, after the Bank of Canada pulled off a surprise with just a 50 bps rate hike yesterday. Let's try to keep things short in a light preview of what to expect from Lagarde & co. later in the day.
What can we expect on the rate decision?
A 75 bps rate hike is pretty much a done deal. I don't expect policymakers to move too aggressively with a 100 bps rate hike as the debate over the past month or so has ever been between a 50 bps and 75 bps move. As such, the latter is very much priced in already so don't expect much upside reaction to the euro once the decision is announced.
Instead, Lagarde's press conference will be the more interesting part as markets will look to decipher her every word in trying to interpret the level of hawkishness/dovishness.
What else is on the cards?
I would expect Lagarde to continue to be rather vague about the so-called neutral rate. She should reiterate that they are headed towards that and that tighter policy is still very much needed in the wake of record inflation in the euro area. It will be interesting to see if she sticks with this line though: We will continue to hike rates in the next several meetings.
Besides that, don't expect much on QT as all the focus and attention seems rather premature. I mean, this is an economy that is headed towards a winter recession with the energy outlook for next year still rather iffy. It's hard to imagine policymakers trying to act too tough by floating any firm QT plans. So, that might be a bit of a setback for the bulls.
Where does that leave the euro?
On the balance of things, the path of least resistance remains for a softer currency. It's hard to imagine how any of the developments will translate to a stronger euro. Sure, Lagarde may talk up more aggressive rate hikes to follow with the next one being in December. However, even with any hawkish connotations, any further upside correction in EUR/USD may only prove to be temporary.
The pair is now running into its 100-day moving average at 1.0087 with the 12 September high near 1.0200 adding to a layer of resistance in the short-term. Those are key technical levels in play at the moment.
But with markets staying rather pessimistic about the euro area outlook going into next year and if the Fed reaffirms its ongoing communique next week, it's tough to see traders turn tail in EUR/USD as the dollar will remain strong once the dust settles in this whole central bank bonanza.
