EUR/USD looks to the ECB rate decision – Daily Market Brief, October 27, 2022

EUR/USD trades above parity at a six-week high ahead of the ECB rate decision. The central bank is expected to hike by 75 basis points.

·         BoC raised rates by a smaller-than-expected 50 basis points as concerns of a slowdown mount.

·         Expectations that the Fed could slow the pace of rate hikes in December mount

·         Meta falls 19% in extended hours after EPS misses forecasts and reality lab losses widen.

The BoC hiked by 50 basis points yesterday, less than the 75 basis points expected. The decision to slow the pace of rate hikes comes as BoC policymakers and governor Tiff Macklem grow increasingly concerned about a deeper economic slowdown. While he recognized that more rate hikes were needed, the pace of hikes was likely to be slower.

The move to slow the pace of hikes comes after the RBA made a similar move in its October meeting. Both countries have high household indebtedness on variable mortgages. Investors were busy drawing comparisons with the US, and expectations continued to rise that the Federal Reserve could also start to slow the pace of rate hikes after November. This week’s housing data from the US has shown a clear cooling in the housing market, as mortgages rise over 7%, the highest level since 2001, stifling demand. USD/CAD fell 0.4% yesterday to 1.3350, hitting a three-week low.

Hopes of a less hawkish Fed boosted European stocks, which closed higher yesterday. Wall Street put in a mixed performance, with the Dow Jones closing flat while the Nasdaq closed 2% lower, pulled down by disappointing big tech earnings.

Meta

Meta is the latest big tech firm to report earnings, with the Facebook parent adding to the gloom surrounding big tech as advertisers pull out. Shares in Meta have plunged 19% in extended hours trading, wiping $65 billion from its market cap. Profits missed forecasts at $1.64 on declining revenue of $27.24 billion. Fourth-quarter revenue guidance was also downwardly revised to $30-$32.5 billion. Reality labs also suffered wider-than-expected losses, failing to convince investors that big bets on the metaverse and AI were paying off.

ECB rate decision

The ECB meets today to discuss monetary policy. The central bank is widely expected to raise interest rates by 75 basis points, the third straight rate hike and the second consecutive hike of this size. The move comes as the ECB struggles to tame record-high inflation as the economy teeters on the brink of recession if it isn’t already in recession. The slowing economy and ongoing energy crisis mean that the ECB is unlikely to raise rates by more than 75 basis points.

Investors will be keen to hear what the ECB has planned for the upcoming meetings and look for clear guidance on how high-interest rates could rise. The bank’s main rate is currently at 0.75%, and the broad consensus is that it will be at 2% by the end of the year. This would imply a 50 basis point hike in December.

Aside from rate hikes, a key question will be when the ECB will start unwinding its balance sheet. This is likely to be a slow, gradual process starting next year.

EUR/USD has risen for the past five sessions, pushing above parity to a six-week high. A hawkish-sounding ECB could lift the pair high.

The DAX also trades at a six-week high, over 13000.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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