On Thursday, the EUR/USD pair turned lower after failing to hold on to its highest levels since mid-September around 1.0090 earlier in the day.
The main currency pair has lost its bullish momentum as the dollar returns to growth after two consecutive daily pullbacks of 1% against its European counterpart.
The greenback managed to regain composure and rebounded from the multi-week lows recorded earlier in the area of 109.40 points, amid cautious market sentiment.
Investors were waiting for the announcement of the European Central Bank's verdict on monetary policy, as well as the release of US GDP data for the third quarter.
It is widely expected that the ECB will raise the key rate by 75 basis points following the results of the next meeting. However, it is not so much the central bank's decision on the rate as its rhetoric that can affect the euro exchange rate against the dollar.
If the central bank announces its readiness to stick to an aggressive tightening course with another major rate hike in December, the EUR/USD pair is likely to strengthen.
On the other hand, it will be difficult for the euro to find demand if it becomes known from its final statement that some participants of the meeting were inclined to raise the rate by 50 bps in October. A similar reaction may follow if the central bank says that it does not expect another significant rate hike before the end of the year.
The EUR/USD pair continues to trade above the parity level in anticipation of the ECB meeting. Another rate hike of 75 bps is expected. Any disappointment may put pressure on the euro, according to economists at OCBC Bank.
"The focus is on the rhetoric of the ECB. Does the central bank plan to slow down policy normalization as growth prospects decline? Markets are also monitoring whether officials have begun discussing quantitative tightening and changing TLTRO rules to reduce excessive volatility. The risk is that if the ECB voices a slightly less hawkish position, then even with a 75 bps rate hike, the euro may still trade downward," they said.
Although inflation in the eurozone continues to remain uncomfortably high, renewed concerns about a serious recession in the currency bloc actually puts the ECB between a rock and a hard place.
"Econometric analysis shows that core inflation in the eurozone is completely inert. Therefore, the ECB will have to put up with either core inflation of about 6% at least until 2024, or with a tighter monetary policy than is currently expected," Natixis analysts said.
"Today the ECB should announce its decision on the interest rate. Throughout the year, the central bank surprised with a hawkish attitude, but the EUR/USD pair usually ended the day after the ECB policy announcement with a decline. It seems that investors are using the liquidity provided in connection with the risk of ECB meetings to reset the euro," ING strategists noted.
"Now we have slightly softer conditions, and the EUR/USD pair has confidently emerged from this year's bearish channel. This may indicate the probability of the pair's growth to 1,0200. If the market does find something bearish in the final ECB announcement, ideally the pair will need to go back below the 0.9920-0.9950 area to return to the downward trend," they added.
Almost simultaneously with the announcement of the ECB's monetary policy decision, the first estimate of US GDP for the third quarter will be released.
According to forecasts, the indicator will show an increase of 2.4% year-on-year after a decrease of 0.6% recorded in the second quarter.
Since the beginning of the week, investors have been reducing long positions in the US currency whenever disappointing data on the United States came out.
Consequently, we can expect a similar reaction when weaker-than-forecast data on US GDP will put pressure on the dollar and vice versa.
"Today we will receive data on US GDP for the third quarter. There are downside risks to the consensus forecast of 2.4%, given the decline in consumption and investment in housing construction. Such a result may fuel the corrective forces currently operating against the dollar. As a result, the USD correction may reach the 100-day moving average at 108.42," ING analysts noted.
However, this report may have only a minor impact on the Fed's monetary policy, as the central bank monitors data on personal consumption prices for September and data on labor costs for the third quarter, which will be published on Friday.
The EUR/USD pair has risen above parity, but there is reason to believe that the weakening of the dollar is a temporary phenomenon, Nordea economists say. They predict that by the end of the year, the world's most popular currency pair will reach 0.9300.
Markets will again get a cold shower from the Federal Reserve at the November meeting, experts warn.
"The Fed will need to see clear signs of weakening wage growth before they are satisfied, and we hardly believe that this will happen with this week's data, when the US labor market is still showing an excess of demand over supply. Thus, the weakening of the dollar, which we are currently observing, may well be short-lived if the employment cost index shows high wage growth, which, in turn, will push the yields of treasuries up and stocks down," Nordea reported.
The bank expects a 75 bps Fed rate hike next week, as well as a 50 bps hike in December 2022 and February 2023.
"The latest forecasts promise mild weather in the eurozone in the near future. While this will bring much-needed relief to the eurozone, the energy crisis is far from resolved. Over time, the weather will become colder, which will force companies to use gas storage facilities. Political/fragmentary risks are still present, and we believe that it will be difficult for the ECB to raise rates as much as the markets expect. Moreover, the expected ECB rate hike has attracted criticism from the new Italian prime minister. All this makes us still doubt the stability of the euro. We forecast the EUR/USD exchange rate at 0.9300 around the end of the year," Nordea said.
The EUR/USD pair recovered above the parity level for the first time since September 20. Nevertheless, it will be difficult for it to achieve further growth, Societe Generale strategists believe.
"The recovery of EUR/USD above parity for the first time since September 20 logically calls into question the downward trend of the pair from the February area of 1.1500. Although we cannot rule out another round of profit-taking on the dollar after the ECB meeting and at the end of the month on Monday, we believe that it may make sense to abandon shorts on the US currency on growth until we hear the Fed's verdict next week," they said.
The initial support for EUR/USD is the 1.0050 mark before the key level of 1.0000. A drop below parity may attract additional bears and cause the pair to decline to 0.9950 (20-day moving average).
The nearest resistance is at 1.0100. If the pair manages to turn this level into support, it will be able to aim first at 1.0175, and then at 1.0200.
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