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Daily Pivots: (S1) 1.1495; (P) 1.1567; (R1) 1.1703; More...

GBP/USD's rally is still in progress and intraday bias stays on the upside. Break of 61.8% projection of 1.0351 to 1.1494 from 1.0922 at 1.1628 will extend the rise from 1.0351 to 100% projection at 1.2065. On the downside, below 1.1429 minor support will turn intraday bias neutral first. But further rally will remain in favor as long as 1.0922 support holds, in case of retreat.

In the bigger picture, fall from 1.4248 (2018 high) is part of the long term down trend from 2.1161 (2007 high). Outlook will stay bearish as long as 1.1759 support turned resistance holds. Parity would be the next target on resumption. Nevertheless, firm break of 1.1759 will confirm medium term bottoming, and open up stronger rise back to 55 week EMA (now at 1.2392).

Summary

• The European Central Bank (ECB) delivered another large rate hike at today's monetary policy announcement, though its forward guidance was perhaps somewhat less hawkish than at previous recent meetings.
• The ECB raised its Deposit Rate by 75 basis points for a second straight meeting, to 1.50%, matching the consensus forecast. In a widely expected move, the ECB also adjusted the terms on its targeted longer-term refinancing operations, given the evolving economic circumstances and especially the surge of inflation. Going forward, the ECB will adjust the interest rates applicable on those operations from what had previously been very favorable terms.
• Overall, we view the mildly less hawkish guidance and widespread signs of a contracting Eurozone economy as consistent with a smaller 50 basis point Deposit Rate hike to 2.00% in December, especially if CPI inflation recedes to any extent in the interim.

European Central Bank Goes Big

The European Central Bank (ECB) delivered another large rate hike at today's monetary policy announcement, though its forward guidance was perhaps somewhat less hawkish than at previous meetings. With the possibility of an ECB pivot at the meetings ahead, and with changes to long-term refinancing operations potentially impacting the profitability of European banks, today's announcement is overall a modest negative for the euro.

The ECB raised its Deposit Rate by 75 basis points for a second straight meeting, to 1.50%, matching the consensus forecast. The central bank also raised its main refinancing rate and marginal lending rate by 75 basis points.

However, there were hints in the accompanying statement that smaller interest rate increases may not be that far away. The ECB said:

"With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation. The Governing Council took today’s decision, and expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target. The Governing Council will base the future policy rate path on the evolving outlook for inflation and the economy, following its meeting-by-meeting approach."

The reference to "substantial" progress, as well as following a meeting-by-meeting approach, both hint at the possibility of transitioning to smaller rate increases at upcoming meetings. With reference to the economic outlook, ECB President Lagarde said growth risks were on the downside while inflation risks were on the upside.

In a widely expected move, the ECB also adjusted the terms on its targeted longer-term refinancing operations (TLTRO III), given the evolving economic circumstances and especially the surge of inflation. Going forward, the ECB will adjust the interest rates applicable on those operations from what had previously been very favorable terms. The ECB said:
"From 23 November 2022 until the maturity date or early repayment date of each respective outstanding TLTRO III operation, the interest rate on TLTRO III operations will be indexed to the average applicable key ECB interest rates over this period. The Governing Council also decided to offer banks additional voluntary early repayment dates."

And also that:
"Finally, in order to align the remuneration of minimum reserves held by credit institutions with the Eurosystem more closely with money market conditions, the Governing Council decided to set the remuneration of minimum reserves at the ECB’s deposit facility rate."

Finally, there were no signals from today's announcement regarding quantitative tightening. The ECB said it intends to reinvest in full the principal payments from maturing securities purchased under the Asset Purchases Program for an extended period of time past the date when it started raising the key ECB interest rates. Regarding the Pandemic Emergency Purchase Program, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024. The guidance regarding quantitative tightening is unchanged from previous announcement. At the current juncture, our view remains an "in principle" decision on quantitative tightening will be announced at the ECB's December meeting.

Overall, we view the mildly less hawkish guidance and widespread signs of a contracting Eurozone economy as consistent with a smaller 50 basis point Deposit Rate hike to 2.00% in December, especially if CPI inflation recedes to any extent in the interim. That view appears to be shared by market participants, with German two-year government yield down around 18 basis points to 1.85% since the ECB's announcement, and with the euro also down today. If the Federal Reserve fails to pivot at its monetary policy announcement next week, the euro could see further downside in the weeks and months ahead.

• Real GDP expanded by 2.6% quarter-over-quarter (annualized) in the third quarter of 2022. The reading came in a touch above the consensus forecast, which called for a gain of 2.3% q/q.
• Consumer spending grew by 1.4% – a deceleration from the 2.0% recorded in Q2. Spending on services (2.8%) accounted for all of the gain, while goods expenditures (-1.2%) were lower. Declines in goods were spread across durables (-0.8%) and non-durable (-1.2%) expenditures.
• Non-residential business investment expanded by 3.7%, as continued gains in intellectual property products (6.9%) and a rebound in equipment investment (10.8%) more than offset the pullback in non-residential structures (-15.3%). Structures investment has now contracted for six consecutive quarters and is down 13.4% since Q1-2021.
• Residential investment (26.4%) fell sharply in Q3, as home construction slowed, and sales of new and existing homes fell by over 10% on the quarter. Outside of the pandemic, the pullback in Q3 residential investment was the largest decline since Q1-2010. From a contribution to growth perspective, residential investment shaved 1.4 percentage points (pp) from GDP.
• After having declined for five consecutive quarters, government spending rose by 2.4%, with gains coming from both federal (3.4%) and the state & local (1.7%) level.
• Exports grew by 14.4% in the third quarter, with gains spread across both goods (17.2%) and services (8.4%). Imports declined by 6.9%, as the pullback of imported goods (-8.7%) was only partially offset by the modest gain in services (2.4%). This led to a further narrowing in the trade deficit, resulting in net trade adding 2.8 pp to Q3 GDP.
• Inventory investment shaved a more modest 0.7pp from third quarter growth – a marked improvement from the 1.9pp drag in Q2.

Key Implications

• After having declined in each of the first two quarters of the year, real GDP rebounded to an above trend (~1.8%) pace in the third quarter. Admittedly, the headline number exaggerates the current degree of strength in the U.S. economy, as net exports made an outsized contribution to third quarter growth. Conversely, the domestic drivers remained relatively unchanged from the previous quarter with household consumption and fixed investment adding only 0.1 percentage points to headline growth – down from 0.5pp in Q2.
• Households experienced a record drop in net worth in the second quarter, as the sharp pullback in equities helped to erase $6.1 trillion from household balance sheets. The deceleration in Q3 consumer spending suggests the cumulative impact of higher interest rates, eroding purchasing power from elevated inflation and the decline in net worth are all exerting a considerable drag on consumer spending. With accumulated savings having been drawn down faster than previously anticipated, and a further softening in home prices expected – exerting a further drag on household net worth – consumer spending will likely continue to weaken in the months ahead.
• GDP is backward looking and will therefore have little bearing on the Fed's decision making when they meet next week. With inflation data remaining hot and showing little conviction of rolling over and the labor market still incredibly tight, another 75-basis point hike seems likely.

Daily Pivots: (S1) 0.9989; (P) 1.0039; (R1) 1.0134; More...

EUR/USD retreated after hitting 1.0092 and intraday bias is turned neutral first. Overall, rise from 0.9534 is still expected to continue as long as 4 hour 55 EMA (now at 0.9885). Above 1.0092 will resume the rally from 0.9534 to 38.2% retracement of 1.1494 to 0.9534 at 1.0283.

In the bigger picture, the case of medium term bottoming at 0.9534 building up, with bullish convergence condition in daily MACD. While it is too early to call for trend reversal, firm break of 0.9998 opens up stronger rebound back to 55 week EMA (now at 1.0630) even as a corrective rise. This will now be the favored case as long as 55 day EMA (now at 0.9937) holds.

Euro softens broadly today after ECB delivered 75bps rate hike as widely expected. President Christine Lagarde delivered no specially hawkish message that could give Euro another lift. On the down hand, Dollar is recovering, with some help from better than expected GDP data. But the greenback remains the worst performed followed by Canadian and Swiss Franc. Sterling is the leader.

Technically, EUR/CHF's retreat now suggests that a temporary top is in place at 0.9953, just ahead of parity. Some consolidations could be seen. But another rise will remain in favor as long as 0.9798 resistance turned support holds. Rise from 0.9407 should still resume at a later stage.

In Europe, at the time of writing, FTSE is up 0.17%. DAX is up 0.05%. CAC is down -0.30%. Germany 10-year yield is down -0.102 at 2.014. Earlier in Asia, Nikkei dropped -0.32%. Hong Kong HSI rose 0.72%. China Shanghai SSE dropped -0.55%. Singapore Strait Times rose 0.23%. Japan 10-year JGB yield dropped -0.0055 to 0.253.

ECB hikes 75bps, recalibrates TLTRO III

ECB raises interest rates by 75bps as widely expected. The main refinancing, marginal lending, and deposit rates are 2.00%, 2.25%, and 1.50% respectively, with effect from November 2. The central bank also maintains tightening bias, and said, it "expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target."

Future policy rate path will be based on the "evolving outlook for inflation and the economy", and follow its "meeting-by-meeting approach.

Also, the terms and conditions of the TLTRO III refinancing operations are changed, and "recalibrated" to ensure consistency with broader monetary policy normalization process.

US GDP grew 2.6% annualized in Q3, slightly above expectations

US GDP grew at annualized rate of 2.6% in Q3, above expectation of 2.4%. PCE price index growth slowed from 9.0% to 4.1%, below expectation of 5.4%.

BEA noted that the increase in real GDP reflected increases in exports, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending, that were partly offset by decreases in residential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.

Also released, durable goods orders rose 0.4% mom in september, below expectation of 0.5% mom. Ex-transport order dropped -0.5% mom, worse than expectation of 0.0% mom. Initial jobless claims rose 3k to 217k in the week ending October 21.

Germany Gfk consumer sentiment rose to -41.9, too early to speck of a trend shift

Germany Gfk Consumer Sentiment for November improved from -42.8 to -41.9, slightly below expectation of -41.8. In October, economic expectations dropped from -21.9 to -22.2. Income expectations rose from -67.7 to -60.5. Propensity to buy also rose from -19.5 to -17.5.

"It is certainly too early to speak of a trend shift at this time. The situation remains very tense for consumer sentiment," explains Rolf Bürkl, GfK consumer expert. "Inflation has recently risen to ten percent in Germany, and concerns about the security of energy supplies continue to rise. Therefore, it remains to be seen whether the current stabilization will last or whether, considering the upcoming winter, there is reason to fear a further worsening of the situation."

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 0.9989; (P) 1.0039; (R1) 1.0134; More...

EUR/USD retreated after hitting 1.0092 and intraday bias is turned neutral first. Overall, rise from 0.9534 is still expected to continue as long as 4 hour 55 EMA (now at 0.9885). Above 1.0092 will resume the rally from 0.9534 to 38.2% retracement of 1.1494 to 0.9534 at 1.0283.

In the bigger picture, the case of medium term bottoming at 0.9534 building up, with bullish convergence condition in daily MACD. While it is too early to call for trend reversal, firm break of 0.9998 opens up stronger rebound back to 55 week EMA (now at 1.0630) even as a corrective rise. This will now be the favored case as long as 55 day EMA (now at 0.9937) holds.

Economic Indicators Update

As we previously warned, major central banks worldwide that hold massive amounts of dollar securities are stepping up interventions to support their national currencies. On Wednesday, China, Japan, and Switzerland resorted to such measures. The UK and India used earlier the same tool.

Countries are using this short-term tool to stop the one-sided selling of their national currencies. A longer-term measure is to raise rates, but its side effect is that the time lag and the impact on the real economy, many of which are already heading for a recession, is too long.

On the speculative side, other consequences of this intensification of FX interventions are essential. More dollars are becoming available in the financial system, which counteracts the kind of liquidity drying that the Fed is engaged in by sharply raising rates and shrinking the balance sheet.

Central banks’ very regular dollar sales set the stage for at least a corrective pullback. Yesterday, for the first time since January of this year, the DXY Dollar Index was 1% below its 50-day average, which acts as a medium-term trend signal line.

Looking at the chart outside the context of FX interventions, the sharp dip below the line calls into question the continuation of the dollar’s rising trend. More locally, without the dollar returning to gains before the end of this week, the priority scenario for the FX market could be a correction in the DXY.

Given the total amplitude of the rally from the “double bottom” of January-May 2021 to the highs of September 2022, a pullback to the 104-105 area is possible. The target range’s lower end was the Dollar surge’s highs in March 2020. The 200-day moving average, which serves as a long-term trend indicator, pulls into the same area. The upper boundary is the retracement area to the 61.8% level of the dollar’s rise since the beginning of 2021.

https://www.youtube.com/watch?v=EbrC2HNBk4g

US GDP grew at annualized rate of 2.6% in Q3, above expectation of 2.4%. PCE price index growth slowed from 9.0% to 4.1%, below expectation of 5.4%.

BEA noted that the increase in real GDP reflected increases in exports, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending, that were partly offset by decreases in residential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.

Full release here.

ECB raises interest rates by 75bps as widely expected. The main refinancing, marginal lending, and deposit rates are 2.00%, 2.25%, and 1.50% respectively, with effect from November 2. The central bank also maintains tightening bias, and said, it "expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target."

Future policy rate path will be based on the "evolving outlook for inflation and the economy", and follow its "meeting-by-meeting approach.

Also, the terms and conditions of the TLTRO III refinancing operations are changed, and "recalibrated" to ensure consistency with broader monetary policy normalization process.

Full statement here.

The Governing Council today decided to raise the three key ECB interest rates by 75 basis points. With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation. The Governing Council took today's decision, and expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target. The Governing Council will base the future policy rate path on the evolving outlook for inflation and the economy, following its meeting-by-meeting approach.

Inflation remains far too high and will stay above the target for an extended period. In September, euro area inflation reached 9.9%. In recent months, soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand have led to a broadening of price pressures and an increase in inflation. The Governing Council's monetary policy is aimed at reducing support for demand and guarding against the risk of a persistent upward shift in inflation expectations.

The Governing Council also decided to change the terms and conditions of the third series of targeted longer-term refinancing operations (TLTRO III). During the acute phase of the pandemic, this instrument played a key role in countering downside risks to price stability. Today, in view of the unexpected and extraordinary rise in inflation, it needs to be recalibrated to ensure that it is consistent with the broader monetary policy normalisation process and to reinforce the transmission of policy rate increases to bank lending conditions. The Governing Council therefore decided to adjust the interest rates applicable to TLTRO III from 23 November 2022 and to offer banks additional voluntary early repayment dates.

Finally, in order to align the remuneration of minimum reserves held by credit institutions with the Eurosystem more closely with money market conditions, the Governing Council decided to set the remuneration of minimum reserves at the ECB's deposit facility rate.

The details of the changes to the TLTRO III terms and conditions are described in a separate press release to be published at 15:45 CET. Another technical press release, detailing the change to the remuneration of minimum reserves, will also be published at 15:45 CET.

Key ECB interest rates

The Governing Council decided to raise the three key ECB interest rates by 75 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 2.00%, 2.25% and 1.50% respectively, with effect from 2 November 2022.

Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)

The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it started raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance.

As concerns the PEPP, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.

Refinancing operations

The Governing Council decided to adjust the interest rates applicable to TLTRO III. From 23 November 2022 until the maturity date or early repayment date of each respective outstanding TLTRO III operation, the interest rate on TLTRO III operations will be indexed to the average applicable key ECB interest rates over this period. The Governing Council also decidedto offer banks additional voluntary early repayment dates. In any case, the Governing Council will regularly assess how targeted lending operations are contributing to its monetary policy stance.

***

The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises at its 2% target over the medium term. The Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:45 CET today.