Τhe ECB delayed the introduction of a new payment system citing geopolitics and the need for stability, which may have convinced markets that the ECB will be more cautious on rates now as well. The new payment system is associated with T2 liquidity-management model that was supposed to be introduced on November 21. It has been pushed back to March next year, with the ECB saying that the delay is “driven by the need to allow users more time to complete their testing in a stable environment”.
Officials also said that the decision “took into account the importance and systemic nature of T2, especially in view of the current geopolitical conditions and volatile financial markets”. The comments suggest that the overall situation is increasingly weighing on the ECB’s mind and may also have an impact on next week’s policy decision.
ECB’s Nagel wants to reduce asset holdings soon. The Bundesbank President said yesterday evening that “it is important to look at the high bond holdings”, adding that in his view “there is a strong case to soon begin not replacing all maturing bonds”. With the ECB set to bring interest rates to a neutral level by the end of the year, the issue of QT will become a hot topic early in 2023, although the problem for the central bank is that the flexible re-investment of redemptions is the only option the ECB has at the moment to keep spreads in. Short of triggering the new emergency bond buying mechanism the ECB would eliminate the remaining support for BTPs in particular, if redemptions are no longer re-invested, although it would be a slow and long process and unless markets lose confidence in Italy’s fiscal policy, which is a possibility of course, the impact should be limited.
ECB on path to bring deposit rate to 2% by year end. ECB’s Villeroy flags slowed down tightening path next year. Villeroy repeated that once the key interest rates are at a neutral level, which should be by the end of the year, the ECB can slow down the pace of tightening. Villeroy seems to put the neutral level for the deposit rate at 2.0%, and with another 75 bp hike on October 27 and a further 50 bp in December, that would give the ECB some time to assess the situation. Bundesbank President Nagel meanwhile warned that the European Commission must withdraw support quickly, but “not stop too early”. Those comments signal that while the ECB seems pretty much in agreement on the outlook until the end of the year, next year’s decision will be more difficult, especially as Villeroy also signaled some nervousness that the situation in the UK, where the risk of a “vicious loop” prompted the BoE to restart bond purchases, will complicate the picture as central banks discuss QT.
In the meantime, from a data perspective, today, the Eurozone current account deficit continues to widen. The sharp rise in input costs has wiped out the Eurozone trade surplus and pushed the current account into deficit as well. The deficit stood at EUR -26.3 bln in August, after EUR -20.0 bln in July. The secondary income balance has also stayed firmly negative, but it is the deterioration of the goods balance that has pushed the current account into deficit. With governments pushed to splash out to ease the cost of living crisis and the pain of rising energy costs, the Eurozone is facing a double deficit, that is adding to pressure on the EUR.
With ECB officials already flagging a potential slowdown in tightening moves next year, while the Fed remains unwaveringly hawkish, the chances that EURUSD will climb back above parity seem pretty slim at the moment. Improved risk appetite may have halted the ascent of the US Dollar for now, but it would likely take a shift at the Fed and a signal that US officials are no longer happy with the strength of the Dollar to give EURUSD a lasting lift.
The EURUSD posted a new pullback yesterday from the 50-DMA that interestingly clashes with the 5-month upper channel line. According to the RSI, the market could maintain itself at 0.9800 in the short-term as the RSI is at neutral. However in the medium and long term it is expected to hold under pressure with RSI unable to move above 50 the whole year and as the MACD oscillator is hovering well below the zero level.
On the upside, the price could attempt to retest again the 50-day SMA and the parity level at 1.0000, which if successfully broken, could open the door for the 1.0100 level, however such a move looks limited. A reversal to the downside, however, could find immediate support at the September-October’s bottom at 0.9530-0.9600 area.
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Andria Pichidi
Market Analyst
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