Euro forecast for the week ahead: EUR/USD eyes jumbo ECB rate hike as recession looms

Euro fundamental forecast: neutral

The euro gained about 1.4 percent against the US dollar last week, marking the best 5-day period since late May. EUR/USD could thank less hawkish speeches from Federal Reserve members on Friday. This was as policymakers entered a blackout period, giving markets some interesting comments to digest until the central bank’s next interest rate announcement in November.

But, that isn’t for another couple of weeks. The focus for EUR/USD turns to the European Central Bank, which sets interest rates on Thursday. With inflation continuing to ravage the Euro-Area, the ECB is seen continuing with its most aggressive tightening cycle in its history. Policymakers are seen raising the Main Refinancing Rate and Deposit Facility Rate by 75-basis points to 2% and 1.5%, respectively.

That is largely priced in. Absent a surprise, the adjustments themselves will likely do little to further influence the euro. All eyes will then shift to what could be in store for December. Looking at market pricing, the ECB is seen raising rates by 50-basis points at the end of 2022. There is about a 50% chance that another 25-basis points could be tacked on top of that.

As such, if ECB President Christine Lagarde continues to press on with the message of fighting inflation, a firming of another 75-basis point hike in December could bode well for the euro. Markets are also keen for more details on when quantitative tightening could begin. Although, it doesn’t seem likely that a specific date might be offered.

Policymakers are also pressing on with tightening despite rising fears of a recession in the Eurozone economy. Preliminary German third-quarter GDP data will be released on Friday, likely showing a significant slowdown from the second quarter. Meanwhile, German inflation data will also cross the wires. CPI is seen at 10.1% y/y in October.

Euro traders ought to also pay attention to data out of the United States. A strong third-quarter GDP print is expected on Thursday. This will be followed by the Fed’s preferred inflation gauge, PCE core, on Friday. As such, the possibility of this data undermining the less hawkish Fedspeak noted earlier could offer the US dollar a lift at the cost of market sentiment. This leaves the euro fundamental forecast neutral.

Euro fundamental drivers

This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.