In an interview with the newspaper Delfi, ECB President Christine Lagarde said that the likelihood of a recession in the Euro Area has increased and that while uncertainty remains high, ‘a central bank has to focus on its mandate’. President Lagarde added, ‘The destination is clear, and we are not there yet. We will have further rate increases in the future. I’m not going to give you a number because we have turned our back on forward guidance in the current highly uncertain environment. We will decide on the future path and the pace of our rate increases on a meeting-by-meeting basis’. Ms. Lagarde’s comments come in the same week that Euro Area headline inflation hit 10.7% y/y, up sharply from 9.9% in the previous month.
The Federal Reserve is fully expected to announce another 75 basis point interest rate hike tomorrow, the fourth straight three-quarter point hike. The likelihood of a 5th 75bp hike at the December meeting is however in doubt. The latest CME Fedwatch tool shows an 86.2% chance of a 75 basis point hike by the Federal Reserve on Wednesday. The December 14 meeting looks tighter with both a 50bp or a 75bp hike priced in by around 45%. This recent pairing back of rate expectations has given risk assets a boost over the past 2-3 weeks.
ws the ongoing weakness in the pair with the Euro unable to move higher on any short-term US dollar weakness. While the pair is trying to break a series of lower highs and lower lows, EUR/USD will need to re-take 1.0093 to convince that the sell-off has been halted in the short-term at least. Wednesday’s Fed announcement and subsequent press conference will steer the pair over the short term.
EUR/USD Daily Price Chart November 1, 2022
Retail trader data show 57.05% of traders are net-long with the ratio of traders long to short at 1.33 to 1.The number of traders net-long is 6.22% higher than yesterday and 10.23% higher from last week, while the number of traders net-short is 4.57% lower than yesterday and 16.62% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bearish contrarian trading bias.