The minutes of the European Central Bank's latest meeting, released yesterday, may indicate that policymakers would not back away from further interest rate hikes, even despite the risk of recession. How is the euro exchange rate reacting?
Policymakers at the European Central Bank agreed at their last meeting that the central bank should continue normalizing and tightening monetary policy to combat high inflation, even in the event of a shallow recession, according to a report on the central bank's October meeting, Trading Economics reports. Officials noted that the outlook for inflation continues to deteriorate, with inflation running too high and many times above forecasts, and that there is a growing risk of its perpetuation and the emergence of second-round effects and a wage-price spiral.
However, the central bank has hinted that it may want to halt ongoing interest rate hikes if there is a prolonged and deep recession, which could curb inflation to a greater extent. The ECB raised its key interest rate by 75 basis points in October, raising borrowing costs to the highest level since early 2009, with broad support for a meeting-by-meeting approach to future monetary policy decisions, depending on the data, according to minutes released yesterday.
Euro exchange rate this week and month
For the euro, the current month appears to be the best since July 2020. The EUR/USD exchange rate rose more than 5 percent in November, reaching its highest level since late June 2022. It seems that, in addition to improving data from the European economy, there may also be an overestimation of expectations for further Fed actions. The U.S. dollar may already be "rallied" if no new factors emerge in the U.S. pushing up expectations for more interest rate hikes.
Source: Conotoxia MT5, EURUSD, Monthly
In front of the EUR/USD, however, there are potential resistances from the chart. We are talking about the lows of late 2016 and the low of March 2020. Thus, the potential resistance zone could stretch between 1.0320 - 1.0640. Nevertheless, looking at the chart, we could see that we are dealing with the biggest correction in the trend since the beginning of 2021.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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