Traders are expecting a strong interest rate hike by the ECB in the September meeting. Based on interest rate derivatives linked to ECB meeting dates, money markets already priced in 125 basis points of tightening by October which implies half a point hike and three quarters point increase spread over the next two policy meetings noting that a growing minority of policymakers have expressed their appetite to follow the federal reserve aggressive rate hike policy and raise 75 basis points.
As per the second estimate, the Euro Area economy expanded 3.9% year-on-year in the second quarter of 2022, below the 4% estimate and the actual increase of 5.4% previous period adding to that, as per trading economics projections, the annual growth rate is expected to be 1% QoQ. Latvian official and governing council member Martin Kazaks stated that the ECB might follow lower interest hiking momentum if the recession cools down inflation.
EU GDP Growth rate Source: www.tradingview.com
The fact that headline inflation is of global primary concern, retreating prices are relieving the markets with Europe’s gas stockpiles countering supply risk from Russia. Dutch TTF gas futures fell 30% from the €346.5 two years peak recorded in August 2022 to €239.8 on September 6th, 2022. However, trading ranges are still very wide reflecting market uncertainty according to Energy Scan the market analysis platform of Engie SA. As this report is developed both November 2022 and December 2022 future contracts are priced at €244.49 and €243.6 projecting that headline inflation won’t tempt to flatten up prior to Q1 2023.
Proceeding the 8 years downtrend from July 2008 till December 2016 where the Euro abandoned 35% of its value against the US dollar and halted to its monthly support at 1.03522, it traded in a 15% range between 1.0340 and 1.2537 till June 2022.
Since July 2022, the Euro lost an additional 5% after breaking down the $1.0340 support level thus losing parity with the USD. Assuming the downtrend momentum accelerates, the Euro’s next support would be $0.9595 followed by October 2000’s bottom at $0.8231. Obviously, the Euro’s potential to rebound requires aggressive bullish momentum to break up $1.034 and $1.0635 resistance zones to modestly trade back in a range.
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