🔴ECB has finished hiking. DE30 under pressure

⌚Today at 1:15 pm BST the ECB will decide on interest rates, no hike is expected

• The ECB raised rates in September by 25 bps and communicated that rates are at a sufficiently restrictive level
• The euro has remained under pressure for some time, although a weak euro is not necessarily an argument for a more hawkish announcement
• EMU CPI inflation fell to 4.3% y/y for September and is expected to fall below 4% for October
• Decision at 1:15 pm BST and press conference at 1:45 pm BST. It is the conference that will focus the main attention of investors
• DE30 along with the euro remain under selling pressure

ECB plans a longer period with high interest rates

Market expectations do not indicate any chance of a hike today. Inflation has fallen quite sharply and is expected to fall further, which justifies keeping rates unchanged. However, in order to achieve the inflation target, the ECB is likely to maintain the message that interest rates will remain unchanged for an extended period. Possible changes in the form of interest rates may not be possible until the second half of next year, if real interest rates become excessively high. At this point, we see that one of the more restrictive periods in recent history is underway.

The real interest rate (based on the deposit rate) is near 0. As you can see, the situation is more restrictive than before the pandemic. Source: Bloomberg Finance LP

Expectations do not give a chance for cuts. Looking at next year, we see that the chance for the first reduction appears in June with a valuation of a move of more than -20 bps. Source: Bloomberg

The economy is weak

Of course, there are voices raised that the cuts could happen earlier, looking at the very weak economic situation. PMI indices in most of the EMU remain below 50 points, indicating a weak situation. In addition, we are seeing higher oil prices, higher gas prices, further weakening the competitiveness of European economies that are heavily dependent on energy imports. On the other hand, it does not seem that the bank will decide to cut faster, given forecasts that pointed to a target as late as 2025. It is worth remembering that inflation in EMU is still higher than in the US, but interest rates are lower. This will require keeping rates unchanged for a long time.

How will the market behave?

The DE30 remains under heavy supply pressure. Stocks are sold off across the board, and in addition, the EURUSD has continued its recent declines, showing that there is a lack of willingness to buy European assets. On the other hand, the DE30 is still near important support: the local lows of March, at the lower limit of the downward trend channel, and at the 38.2 retracement of the entire upward wave that began last fall. If the ECB were clearly dovish and pointed to economic problems and suggested a possible faster rate adjustment next year, there would be a chance of a recovery from the DE30, but this would not necessarily be a good thing for the euro. In turn, indications of keeping rates high for a longer period of time could limit declines on EURUSD.

Source: xStation5