Since the start of this week’s trading, the price of the EUR/USD currency pair has been in a cautious wait until an update to the European Central Bank’s policy is announced. In addition we are also waiting for the US inflation numbers that will be announced on Friday. These events will chart the course of the currency pair’s movements in the coming days. 

Ahead of these events, the price of the euro against the dollar EUR/USD is settling around the 1.0740 level. The markets are looking forward to the approaching date of the last interest rate hike from the European Central Bank. Bank of America warns that the European Central Bank will raise its key deposit rate well above 0% before the year ends, but this risks increasing retail risks in the eurozone.

In a new research note, Bank of America says it now expects a cumulative 150 basis points of a rate hike this year, 50 basis points more than their previous assumptions. They see big moves of 50 basis points in July and September, which is more optimistic than the market consensus which is currently anticipating a more cautious 25 basis point move in July.

Commenting on this, Ruben Segura Caiwela, Europe economist at Bank of America Europe in Madrid, says: “Our call was already more hawkish than the consensus, it is even more powerful now.” “We cannot see the ECB avoid moving 50 basis points by September at the latest.” Such a surprise could boost the euro’s exchange rates initially, but “we remain concerned that this is too fast”, and in fact, the team of economists at Bank of America describes themselves as “conflicting a hawkish call for the European Central Bank” came in a recent note comes days before the European Central Bank’s June policy update, scheduled for Thursday.

The policy update should see the ECB confirm ending its quantitative easing program with the first rate hike confirmed in July. But a rush to tackle inflation could mean the risks of a eurozone fragmentation rise rapidly, “with Italy in the spotlight”.

“To be absolutely clear, we still don’t understand the ECB’s impulse,” the analyst added. We consider ourselves total bears, because we don’t really understand how the economy can go through a very large energy price shock unscathed in the first place, never mind how the economy is supposed to handle neutral rates when it is so far out of equilibrium. Hence, we expect the economy to stop the central bank after all these hikes this year.”

However, the logic of various members of the European Central Bank’s Governing Council has recently been adopted by Bank of America, including President Christine Lagarde. The ECB has made it clear that it wants to be seen as acting against inflation and to be proactive against the risks of second round effects. Eurozone inflation was 8.1% in May 2022, up from 7.4% in April 2022.

Bank of America is concerned that raising interest rates quickly would put undue upward pressure on the so-called peripheral eurozone countries such as Greece and Italy. They are already paying more than countries like Germany and France on their sovereign debt, and higher interest rates from the European Central Bank will inevitably increase their financing costs.

The danger is that the rising costs of financing for these countries become disorganized and trigger a new crisis.

Moreover, the analyst says that markets are not thinking enough about the prospects of a recession in the eurozone, and “we have the impression that recession risks are more easily recognized in the US than in the eurozone.”

What is the solution to the headache facing the eurozone economy?

More financial support is the solution suggested by Segura Caiwela. “Headwinds are coming from all sides, and fiscal policy, at the moment, is doing very little to offset.” Accordingly, Bank of America suggests a more cautious approach to fiscal policy tools could prevail, in anticipation of higher financing costs on the back of monetary tightening. Meanwhile, a shift in the economic landscape will cause the European Central Bank to rein in its ambition to raise interest rates in 2023.

According to the technical analysis of the pair: We expect unstable movements for the EUR/USD currency pair today, pending the announcement of the European Central Bank’s policy update. We are especially focusing on the tone of his statement and the statements of ECB Governor Lagarde. Any indications of a strong policy tightening path will support more gains for the euro against the dollar, and the closest to them will be 1.0785 and 1.0880, and the last level is important to expect the psychological resistance 1.1000, respectively.

In the event of caution to tighten the bank’s policy, it will give the US dollar the opportunity to launch, and thus breaking the 1.0630 support will push the bears to move strongly downward, as is the case with the general trend of the currency pair.

As the pair’s upward momentum continues, the way is open for the lira to reach 16.63 levels.

Today’s recommendation on the lira against the dollar

Risk 0.50%.

The buy trade of the target day recommendation was activated, and half of the contracts were closed at a profit with the price moving in the direction of the target and moving the stop loss point to enter.

Best entry points buy

• Entering a long position with a pending order from the current levels 15.85
• Set a stop loss point to close the lowest support levels 15.65.
• Move the stop loss to the entry area and continue to profit as the price moves by 50 pips.
• Close half of the contracts with a profit equal to 75 pips and leave the rest of the contracts until the strong resistance levels at 16.05.

Best selling entry points

• Entering a short position with a pending order from 16.00 levels
• The best points for setting the stop loss are closing the highest levels of 16.11.
• Move the stop loss to the entry area and continue to profit as the price moves by 50 pips.
• Close half of the contracts with a profit equal to 75 pips and leave the rest of the contracts until the support levels 15.58

The Turkish lira continues to decline against the dollar, which was ranked as the third worst currency this year. The currency suffered from the failure of the monetary policy of the Turkish Central Bank, which is under the control of Turkish President Recep Tayyip Erdogan. The lack of independence of the Turkish Central Bank’s decisions reduced the effectiveness of the tools that it could resort to amid bad economic data. As the expansion of the current account deficit coincided with the rise in the trade deficit, inflation reached unprecedented rates for decades, as it approached the levels of 70 percent. At the same time, the Turkish Central Bank insists not to raise the interest rate, as it was satisfied with fixing it after a series of declines. This is contrary to the economic consensus that raising interest rates contributes to lowering inflation rates and helps currencies to rise.

On the technical front, the Turkish lira continues to decline strongly against the dollar, as the pair continues to rise above the moving averages 50, 100 and 200, respectively, on the four-hour time frame as well as on the 60-minute time frame. The pair is also trading the highest support levels, which are concentrated at 15.38 and 15.30 levels, respectively. On the other hand, the lira is trading below the resistance levels at 16.00 and 16.40. As the pair’s upward momentum continues, the way is open for the lira to reach 16.63 levels, which it recorded at the end of last year, as it is the first major resistance level. Please adhere to the numbers in the recommendation with the need to maintain capital management.

Bank of Japan monetary policy meeting minutes released; Yen loses steam; Japan’s economic data exceeds expectations.

The Bank of Japan recently released its monetary policy meeting minutes, in which policymakers discussed forms of making their monetary stimulus measures more sustainable.

One member suggested adjusting the bank’s purchase of risky financial assets, while others discussed how to achieve the bank’s 2 percent inflation target.

Most members agreed that the bank’s steps to ease corporate funding channels are having the intended effects and that the institution shouldn’t hesitate to do whatever is needed to deal with the spread of the coronavirus.

So far, 200,658 COVID-19 cases have been reported in Japan, as well as 2,944 total deaths. Cases have been surging, with medical experts sounding the alarm due to the quick advance of the virus. Despite this, the prime minister reiterated that there is no need to call for a state of emergency.

“We need to show the results of our coronavirus countermeasures,” said the prime minister during an interview. “I’ll spearhead the effort with a mindset to do everything that must be done.”

The last time the bank met, the monetary policy committee decided to leave the short-term cash rate unchanged at -0.1 percent.

Economic Calendar

The markets have not learned much about the current state of the Japanese economy this week.

The Cabinet Office reported that the Leading Economic Index for October stood at 94.3, after being at 93.3 in the previous month and higher than expectations of 93.8. The Coincident Index was lower than expected at 89.4, after being at just 84.8 in the previous month.

On Friday last week, the Bank of Japan announced its decision to leave the cash rates unchanged at -0.1 percent, remaining in line with analysts’ expectations.

Japanese Yen Loses Steam

So far this week, the Japanese yen has lost 0.10 percent against the US dollar, breaking a two-week gaining streak. Meanwhile, the dollar has been gaining ground against a bundle of its main competitors and recovering from the previous week’s losses, advancing 0.49 percent after a 1.06 percent decline.

The relative strength of the yen is concerning Japanese policymakers, who are clearing the path for a foreign exchange market intervention. Exporters need the exchange rate to stay at around 100 yen per dollar.

“Make sure the yen-dollar exchange rate does not cross the 100 yen mark,” Prime Minister Yoshihide Suga told Finance Ministry officials.

Despite the government doing what it can to avoid this situation, analysts expect the yen to break this barrier at some point, especially given the recent weakness of the US dollar.

“Strength in the U.S. economy and Japan’s years of monetary easing have prevented adjustments, but the yen’s advance may pick up a bit next year given the state of the U.S. and its monetary policy stance,” said an analyst at State Street.

Japan’s Economic Numbers Better Than Expected

Numbers are favoring the Japanese economy, which has largely outperformed analysts’ expectations. Economic growth surged in the third quarter, gaining 5.3 percent against forecasts of a 5.0 percent increase, but remained below the second quarter’s 7.9 percent.

The Consumer Price Index also surprised analysts, gaining 1.2 percent annualized and remaining unchanged from the previously released figure. In monthly terms, the index climbed by 0.2 percent, also remaining unchanged from the previously released figure but higher than forecasts of 0.1 percent.

Unemployment levels have also improved with a current rate of 6.7 percent after the previous month’s 6.9 percent, and better than expectations of 6.8 percent.

Upcoming Events

With New Year’s Day next week, not many relevant releases are expected, aside from industrial production data for November, which will be released on Sunday.