Forex Top Team

Euro Weakens as Market Perceives ECB Rate Hike Pause; Confirmation Expected in Today’s ECB President Speech

During yesterday’s ECB Governing Council meeting, the market was divided between expectations of a rate hike and no change in interest rates. In the end, the ECB chose to implement its tenth consecutive rate hike. However, the ECB did not provide indications of further rate hikes, leaving an impression in the market that interest rates will remain at elevated levels for the time being. In response, the Euro initially surged but quickly turned lower. Additionally, market participants interpreted a significant downward revision in GDP growth forecasts for the period from 2023 to 2025 in the ECB staff’s economic outlook as support for the notion of a pause in additional rate hikes. There have also been numerous bearish reports concerning the German economy this week, which may have contributed to the sense that the Euro has exhausted its immediate buying catalysts.

In contrast, US economic indicators have been relatively positive. Inflation has risen due to surging energy prices, but core inflation has shown a slowdown in the rate of increase, causing relatively muted market reactions. This contrasts with Europe’s noticeable economic downturn, and some have noted that the US dollar is more likely to be in demand. Next week, the Bank of England will announce its policy rate decision, and a situation similar to that of the ECB is anticipated.

Amid a relatively favorable environment for the US dollar, the Australian dollar has bucked the trend and risen. This could be attributed to a series of Chinese economic indicators showing some signs of recovery, as well as various factors driving up crude oil futures, inducing demand for the Australian dollar as it is considered a currency of both economic sensitivity and a resource-based economy.

The USD/JPY pair has been trading in the 147 yen range. Today, there were reports related to BOJ Governor Ueda that attracted attention. At the beginning of the week, an interview article with Governor Ueda in the Yomiuri Shimbun mentioned the possibility of assessing materials that could lead to the removal of the massive monetary easing centered on the negative interest rate policy by the end of the year, which triggered yen buying. However, today there are reports of statements from officials indicating a gap between Governor Ueda’s remarks and the market’s interpretation within the BOJ. Nonetheless, the yen-selling reaction has been temporary. Attention is gradually increasing as we approach the BOJ policy meeting next week.

In terms of speaking events, there are scheduled events and press conferences featuring ECB President Lagarde and Banque de France Governor Villeroy de Galhau, among others. Market participants are keen to see if there will be any comments addressing the Euro’s sell-off reaction after the ECB Governing Council meeting.

 

The Euro is expected to continue facing resistance to higher levels. Regarding the Japanese Yen, despite expectations of further strengthening following Governor Ueda’s remarks, it is weaker than anticipated. Today, attention will be on the movement after the release of the U.S. September University of Michigan Consumer Sentiment Index.