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Buy the rumor, sell the fact. The European Central Bank's decision to raise the deposit rate by 75 bps to 1.5%, the highest level in a decade, was widely discussed in the market. It did not come as a surprise, and the EURUSD rally ahead of an important event suggests that such a step by the Governing Council was included in the quotes of the main currency pair. As a rule, if the bullish driver is won back, the currency goes down. Moreover, the European Central Bank has not taken specific steps under the quantitative tightening program, which means reducing the balance of previously purchased bonds by €5 trillion. Rumors remained rumors.
But ECB President Christine Lagarde tightened the terms of the long-term lending program (TLTRO). Its lower rates than the deposit rate allowed banks to earn money without any effort. According to the ECB's accompanying statement, these measures, including a 75 bps hike in borrowing costs, were taken to bring inflation back to the 2% target, although consumer prices will remain high for a long period of time.
Dynamics of European inflation and the ECB rate
In general, the ECB did not report anything new, so short positions on EURUSD on the central bank's verdict on rates look natural. The stronger statistics on US GDP for the third quarter added fuel to the fire. The US economy expanded by 2.6% in July-September against the consensus forecast of 2.4% q/q by Bloomberg analysts. It remains resilient in the face of the Federal Reserve's most aggressive monetary crackdown in decades. At the same time, good news is perceived by the stock market as bad, and the fall of the S&P 500 will spoil the global risk appetite that has just begun to improve and return the demand for the dollar as a safe-haven asset.
It is the absence of surprises from the ECB and strong statistics on US GDP that caused EURUSD to return below parity. Lagarde noted that economic activity in the eurozone has declined significantly, and the ECB expects it to fall further at the turn of 2022/2023. Risks to GDP are tilted down. Unlike inflation.
These events, of course, set the tone for the dynamics of the main currency pair, but its further fate will depend on the FOMC rhetoric at the meeting on November 1-2. After raising the federal funds rate by 75 bps, investors expect the rate of monetary restriction to slow down to 50 bps in December. And if the Fed hints at this, the weakening of the US dollar against major world currencies risks continuing. On the contrary, the determination of Fed Chairman Jerome Powell and his colleagues will be a solid reason for the recovery of the EURUSD downward trend.
Technically, on the daily chart of the main currency pair, the 20-80 bar was formed and won back, which led to the fall of EURUSD from the area of 6-week highs. A kind of red line for the euro is its parity against the US dollar. While the pair is trading lower, shorts on 0.9895 are relevant. Conversely, a return above 1 would bring back the idea of a continuation of the rally towards 1.012 and 1.015.
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