The FX market was pretty quiet this week due to the Thanksgiving holiday. Also, many investors have already ended the trading year; if not, they are preparing to do so soon.
Yet, some events ahead of us are guaranteed to end in rising volatility. One such event is the December European Central Bank (ECB) decision.
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Therefore, paying attention to what the Governing Council members say is critical for the future direction of the euro. For instance, what tone do they use in their speeches – hawkish or dovish?
Isabel Schnabel leaning against an ECB pivot
Yesterday, in a speech held at the Bank of England Watchers’ Conference, Isabel Schnabel ended up being more hawkish than the market expected. She is a Member of the Executive Board of the ECB, so her words matter.
The big question for financial markets (and euro traders) is what the ECB will do next. Will it raise the interest rates by another 75bp in December? Or will it pivot and slow down the interest rate hikes?
Judging by yesterday’s speech, the ECB is far from a pivot.
Schnabel was crystal clear in saying that the incoming data does not justify the slowing down of the pace of interest rate hikes. Hence, a hawkish narrative should support the euro on any dips.
Eurozone excess liquidity is shrinking fast
Last week, everyone interested in where the euro would go next watched how much European Banks would pay in advance from the TLTROs loans provided during the COVID-19 crisis. Two days ago, Eurozone excess liquidity declined by close to EUR250 billion out of EUR4.4 trillion in the system.
Sure enough, it is a small amount.
But the idea here is that the ECB is draining this excess liquidity. Coupled with the hawkish statement from Schnabel, it means that selling the euro in the period ahead is a risky bet.
Plus, there is the wild card everyone should remember–the Ukraine war. Any positive news from Ukraine would boost the euro even further.
Not everyone is bullish on the euro
Buying the euro may make sense according to developments in the monetary policy, but not everyone is bullish on the common currency. German consumer confidence calls for caution.
It is nose-diving, suggesting that a deep eurozone recession is looming. Moreover, it took out the 2020 lows made during the COVID-19 pandemic, and all eyes are now on the retail sales volumes during the upcoming holidays.
All in all, the euro should find buyers on dips. It would not be the first time a currency strengthened on poor economic data. After all, monetary policy should prevail.
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