The euro has every chance to continue gaining in value after the ECB meeting. However, the rise will hardly be long-lasting. In the best-case scenario, the euro will return to the parity level and consolidate slightly above it. The overall trend is unlikely to change. What strategy should traders choose under the current conditions and what should they focus on?
The European Central Bank is on the edge of a considerable key interest rate hike. The regulator is planning to raise the benchmark rate by 75 basis points. Experts and economists have been keenly anticipating this decision. The unprecedented monetary policy tightening presupposes a rise to 0.75% from 0% in the deposit rate, whereas the key interest rate will be hiked to 1.25%.
Markets and investors also suppose that the interest rates will be raised by 75 basis points. Although the recent macroeconomic data was quite sluggish, it did not seriously affect investors' expectations. Meanwhile, rising concerns about the economic slump and its future growth united economists who expect a more moderate hike of just 50 basis points.
If the ECB raises the benchmark rate by 0.75%, it will join more than 40% of central banks in the world, including the US Fed, which launched a radical monetary policy tightening process to cap inflationary pressure. According to recent data, in August, consumer prices surged by 9.1% compared to the previous year. This score exceeds the targeted level of 2% by almost 5 times. Core CPI, excluding food and energy, also hit record peaks. Consumers polled by the ECB suppose that inflation will stay at 5% during the next 12 months and at 3% in the next three years.
I have already mentioned that amid a stable economic situation, such a sharp rise would have led to a rapid and stable increase in the euro. However, under the existing conditions, such steps of the ECB may contribute to the euro's depreciation.
Investors also want to understand how the rising cost of borrowing will affect the ECB's attitude to the 4.5 trillion euros of excess liquidity flowing through the European financial system. They also want to find out when officials will be able to start reducing their accumulated debt obligations.
Since the deposit rate will soon exceed the zero level for the first time in more than a decade, the ECB may relook at the method of reducing the excess liquidity, which is kept on accounts of commercial creditors and totals trillions of euros. The money has been bringing income to the ECB since the deposit rate is negative. However, the situation may change today. In this case, the ECB will have to pay its debts. In July, the regulator said that it would assess the likely reduction of excess liquidity in the near future. Judging by what decisions we expect from the regulator today, this time has come.
From the technical point of view, the risk of a further decline in the euro/dollar pair remains high despite a slight recovery. The pair is still hovering near the parity level, thus causing uncertainties in the medium term. Bulls should consolidate at 1.0000 to push the price higher. If the price exceeds 1.0000, buyers of risk assets will become more confident, thus allowing the pair to climb to 1.0030 and 1.0090. The farthest target is located at 1.0130. If the euro drops, buyers are likely to become active at 0.9940. However, if they fail to protect this level, pressure on the pair will increase, thus supporting the bearish sentiment. In this event, the pair may slide to the low of 0.9980 and 0.9810
Meanwhile, the pound sterling continues trading below figure 15, thus creating difficulties for buyers. The likelihood of an upward correction is tiny, especially if bears return to the yearly low to renew it. Buyers should do their best to consolidate above 1.1450. Otherwise, we will see a massive sell-off with a decline to 1.1405. If the price breaks this level, it will decrease to 1.1360 and 1.1310. The upward correction will become possible only after consolidation above 1.1540. This will allow the pair to recover to 1.1610 and 1.1690.
