Week Ahead: Will ECB Hawks Trigger EURUSD Breakout?

The week ahead promises to be incredibly eventful for financial markets thanks to a potent cocktail of corporate earnings, central bank meetings, and key economic reports.

In the United States, earnings season kicks into higher gear with tech heavyweights under the spotlight while some central banks are expected to continue their fierce battle against inflation. Investors will also receive the US government's first estimate of Q3 growth which could provide fresh insight into the health of the economy as the Fed continues super-sized rate hikes to tame rising prices. With so much going on and the economic calendar packed with key economic releases, volatility could be name of the game. 

However, our focus will be directed on the European Central Bank meeting on Thursday which could inject fresh life into the EURUSD. Before we discuss what to expect from the central bank, here are the scheduled economic data releases/events in the coming week:

Monday, 24 October 

• EUR: S&P Global manufacturing PMI
• GBP: S&P Global manufacturing PMI
• USD: S&P Global manufacturing PMI

Tuesday, 25 October

• EUR: Germany IFO business climate
• GBP: BOE Chief Economist Huw Pill’s speech
• USD: US Conference Board consumer confidence

Wednesday, 26 October

• AUD: Australia inflation
• CAD: Bank of Canada rate decision
• USD: US new home sales
• Oil: EIA crude inventory report

Thursday, 27 October

• CNH: China Industrial profits
• GBP: BOE Deputy Governor Sam Wood’s speech
• ECB: European Central Bank rate decision
• USD: Q3 GDP, Initial jobless claims

Friday, 28 October

• NZD: Consumer confidence
• EUR: Germany inflation & GDP, Eurozone economic & consumer confidence
• JPY: Bank of Japan rate decision, Tokyo CPI, unemployment
• USD: US PCE Deflator, University of Michigan consumer sentiment

The ECB is widely expected to launch another monetary policy bazooka when it meets on Thursday 27th October in a move to contain inflation which is well above the 2% target.

Eurozone inflation is at its highest rate since the measurement began in 1991 at 9.9% thanks to soaring energy prices and disruptions in supply chains due to ongoing geopolitical tensions. Given how inflation remains at such elevated levels, traders are projecting a 90% probability of a 75bp rate hike in November and a 56% probability of another jumbo-sized hike in December.

Putting rates aside, much attention will be directed toward any discussion on quantitative tightening (QT) and new terms for the targeted longer-term refinancing operations (TLTRO). Given the uncertain outlook of the Eurozone economy, geopolitical tensions, and recession risks, it may be too early to consider QT. Besides, Christine Lagarde has repeatedly stated that interest rates would first have to be brought to their normal or neutral levels before this is rolled out.

Should the central bank raise rates as expected and strike a hawkish tone that opens the doors to further aggressive hikes, this could pump euro bulls with renewed strength. Such an outcome may push the EURUSD above the 0.9900 resistance with parity acting as the first level of interest.

Alternatively, if the ECB surprises markets with a smaller rate hike and expresses concern over the outlook for the Eurozone, this could hit rate hike bets beyond November – weakening the euro and encouraging a move below 0.9700 on the EURUSD.

Keep an eye on USD

Although our focus falls on the ECB meeting in the week ahead, we will still pay attention to other key economic reports and events across the globe. In the United States, corporate earnings should keep investors occupied while the preliminary US Q3 GDP figures and the latest consumer confidence could spark dollar volatility. It may be wise to watch out for the PCE Deflator which is the Fed’s preferred measure of inflation. If the dollar can draw renewed strength from encouraging economic data and Fed hike bets, this could clash with euro bulls – resulting in more volatility.

Talking technicals, the Dollar Index (DXY) is currently trading within a symmetric wedge formation on the H4 timeframe. A breakout higher or lower could be on the horizon but this could need a fresh fundamental spark. The key levels of interest can be found at 113.80 and 111.70.

ECB Federal Reserve EURUSD Rates inflation