European Central Bank, euro dollar and parity

The EUR / USD exchange rate returned above parity. And it can stay there until November 2, as long as tomorrow's ECB meeting does not disturb the market.

One of the main events of this week in the financial markets will be the meeting of the European Central Bank (ECB). Investors will know the bank's decision on interest rates on Thursday, October 27 at 14:15. Half an hour later it will start press conference of the head of the ECB, Christine Lagarde.

Forecasts are 75 basis points

The ECB hit the wall after HICP inflation in the euro zone hit 9,9% in September. Y / y, rising from 9,1%. in August, and earlier many times exceeding market expectations. In order to fight the rise in prices, the bank has to raise the cost of money. And it is tight. Economists surveyed by Reuters forecast that the ECB will raise rates by 75 basis points. This will mean that the deposit rate will increase to 1,50%. from 0,75 percent now, and the refinancing rate will increase to 2 percent. from 1,25 percent This scenario is indicated by 3/4 of the interviewed economists. 6 percent of them see an even bigger hike, reaching 100 bp, while 19 percent. indicates a movement of 50 bp.

The hike by 75 bp should already be in prices. Hence the reaction of the financial markets to the ECB meeting, especially the reaction of the couple EUR / USD, it will depend on what message Christine Lagarde sends at the press conference regarding the further path of monetary tightening.

It will not be the only such significant impulse. Much will also depend on the release of European inflation data the day after (Friday, October 28). They will be the first verifier of Lagarde's words. On that day, preliminary readings for October consumer inflation will be published in Germany, France, Spain and Italy.

The Euro dollar continues to grow

Today the EUR / USD rate, for the first time since September 20, is above parity. This is less due to the euro, and more to the dollar, which is weakening in the world. Markets are playing for a possible slowdown in the pace of interest rate increases by the Fed. Not in November yet, but from December. Such expectations appeared after Friday reports by The Wall Street Journal on this subject.

EURUSD daily chart. Source: Tickmill

The situation on the EUR / USD daily chart indicates that this pair may stay above the parity for longer. Yesterday's breakout above the 8-month highs (and at the same time the upper limit of the downward channel), supported by today's breakthrough above the local high from early October and a return above the psychological limit of 1,00, supported by several months upward divergence of the chart with indicators and the recent improvement in the situation on these indicators suggests the possibility of an increase to at least around 1,02.

In a slightly more optimistic scenario, increases will only be stopped by the resistance zone 1,0349-1,0368. The most optimistic scenario assumes, of course, a change in the long-term trend on EUR / USD from downward to upward. However, it is too early to estimate the probability of its implementation.

On the basis of fundamentals, whether the euro will remain above parity should be decided by the Fed, not the results of tomorrow's ECB meeting and Friday's inflation data from Europe. This means that the situation will not be resolved on November 2 at the earliest.