Investors no longer listen to central banks. At least, that was what was observed yesterday, when euro rose despite the dovish statements of ECB chief Christine Lagarde. She firmly said they will keep interest rates near zero as long as necessary, even amid growing inflationary pressures. The ECB also left the deposit rate at -0.50% and the volume of bond purchases at EUR 20 billion per month.
Lagarde’s statements also hint that she is confident on a rate hike as early as next year. After all, it is already clear that inflationary pressures will persist much longer than originally anticipated.
“Our analysis shows that it is unlikely that we will be able to achieve the predictions that were given this summer,” the ECB chief said.
Many are now betting that the ECB will raise rates around September next year.
Back in October, some ECB members addressed inflation, describing moderate growth rates despite opposite indicators. Fortunately, market players never believed their persuasion.
Lagarde’s statements yesterday indicate that many central banks, including UK, US and New Zealand, are rapidly turning towards tightening their policies.
And since inflationary expectations in EU are at their highest level since 1993, yesterday’s meeting was just a prelude to the December showdown over the future emergency stimulus. “Higher inflation is unlikely to continue while the labor market is undergoing a significant decline,” brushed off Lagarde. “As soon as the unemployment rate is adjusted for people on vacation, it will be possible to talk about the formation of more medium-term inflationary pressures observed before the pandemic.”
The surge in the bond market was surprising either. Italy’s 10-year yield, burdened with high government debt, rose 12 basis points to 1.06%. Meanwhile, euro returned to its monthly highs, gaining roughly 0.8%.
Data also indicated that inflation in Spain jumped to 5.5%, while inflation in Germany rose to 4.6%. Economists expect inflationary pressures to hit 3.7%, the highest in 13 years. A fairly significant part of it is associated with rising energy prices and strong economic growth.
With regards to other statistics, Germany reported that the number of unemployed in the country fell 39,000 in October, much higher than the expected 20,000. As such, the unemployment rate decreased to 5.4%, which is so much better compared to September. Obviously, demand for new employees is growing, and short-term employment continues to decline.
But the effects of the coronavirus are still being felt in many developed countries. Access to highly skilled workforce is still a key issue, particularly in the United States.
Going back, economic confidence in the Euro area reportedly rose to a three-month high of 118.6 points in October, thanks to improved performance in the services, construction and retail sectors. But the European Commission’s new economic uncertainty indicator remained virtually unchanged at 14.0, still its highest level before the pandemic.
In the US, economic growth reportedly slowed in the third quarter, coming out at only 2.0%, which is much lower than the 6.7% rise in the second quarter. The reason was the weak growth in consumer spending, which jumped only 1.6% in the third quarter.
Prices rose this 3rd quarter because issues in the supply chain continue to cause problems. This forced customers to pay higher, which, in turn, led to a 26.2% cut in spending on durable goods. Spending on services also slowed to 7.9%.
The modest rise in Q3 GDP also reflects slower increase in private investment and decline in fixed assets.
On the bright side, jobless claims fell 10,000 during the reporting week, so the total was just 281,000. The less volatile four-week moving average also dropped to 299,250.
Technical analysis on EUR/USD
A lot depends on 1.1715 because a breakout could lead to a rise to 1.1750 and 1.1780. But if the quote drops below the level, EUR/USD will plunge to 1.1680, and then slump to 1.1630.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.