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• CHFJPY reversed from resistance level 150.40
• Likely to fall to support level 146.00

CHFJPY currency pair recently reversed down from the key resistance level 150.40 (which has been steadily reversing the pair from the start of September) strengthened by the upper daily Bollinger Band.

The downward reversal from the resistance level 150.40 started the active impulse waves (i) and (C) – which belong to the intermediate ABC wave (2) from the middle of September.

CHFJPY can be expected to fall further toward the next support level 146.00 (which stopped the earlier minor wave A at the start of October).

• GBPCAD reversed from resistance level 1.5720
• Likely to fall to support level 1.5360

GBPCAD recently reversed down from the key resistance level 1.5720 (which has been steadily reversing the pair from the start of August) intersecting with the upper daily Bollinger Band.

The downward reversal from the resistance level 1.5720 stopped the previous impulse waves (iii) and (c).

Given the clear bearish divergence on the daily Stochastic indicator, GBPCAD can be expected to fall further toward the next key support level 1.5360.

As most observers assumed, the ECB raised its key rate by 75 points to 2.0%. These are low rates by modern standards, but the eurozone last saw such rates 14 years ago.

Furthermore, the central bank indicated its intention to withdraw liquidity from the banking system to combat record inflation. Amongst other signals, there is a comparatively dovish guide to further policy tightening. The ECB is signalling its intention to raise the rate further to ensure that inflation returns to the 2% target.

We recall that official inflation was 9.9% YoY in September, and average forecasts suggest a further, albeit slight, acceleration in October. Such a message, in our view, indicates that the ECB remains on the side of the economy and maintains a catch-up role regarding inflation and other CBs (excluding the Bank of Japan). The first impulsive market reaction was to sell the euro and European debt securities, sending EURUSD temporarily below parity.

Nevertheless, this is another signal in the piggy bank that key central banks are already coming out to slow the pace of rate hikes. The Bank of Canada did it yesterday, the Reserve Bank of Australia did it before that, the ECB warned of a slowdown today, and the Fed is signalling that along with a 75-point hike next week, we will hear a signal of further rate slowing.

Having seen a pullback in commodity and agricultural prices and having done some work on policy tightening, the key global central banks seem to be synchronising their policies and preparing to move to a finer tuning. This is a relatively positive shift for equity markets and an additional reason to correct the one-and-a-half-year rally in the dollar.

The Euro pulls back from new six-week high, as traders collected profits from a steep six-day rally, after the action was repeatedly capped by falling 100DMA and daily cloud top, while overbought daily studies contributed to the decision.

Dip below parity (to 0.9972) was so far short-lived, signaling that bullish sentiment remains strong, however daily stretched indicators (momentum and stochastic) are turning south, keeping in play risk of extend consolidation / correction.

Ability to hold above parity would signal strong bullish bias and keep in focus key barriers at 1.0088/1.0090 (10DMA / daily cloud top) clear break of which would signal bullish continuation and expose targets at 1.0172/97 (Fibo 76.4% of 1.0368/1.0535 descend / Sep 12 lower top).

Caution on close below parity (also near daily cloud base) and 0.9984 (Fibo 23.6% of 0.9631/1.0093) that would weaken near-term structure and revive risk of deeper pullback.

Res: 1.0050; 1.0093; 1.0172; 1.0197
Sup: 1.0000; 0.9984; 0.9917; 0.9862

Daily Pivots: (S1) 145.62; (P) 147.01; (R1) 147.80; More...

Intraday bias in USD/JPY stays neutral as consolidation form 151.93 is still extending. Deeper fall might be seen but downside should be contained by 38.2% retracement of 130.38 to 151.93 at 143.69 to bring rebound. Upside of rally attempt should be limited by 151.39 resistance.

In the bigger picture, up trend from 101.18 is still in progress, as part of the whole up trend from 75.56 (2011 low). 147.68 (1998 high) was already met and there is no clearly sign of topping yet. In any case, break of 140.33 support is needed to be the first sign of medium term topping. Otherwise, further rise is in favor to next target at 160.16 (1990 high).

Daily Pivots: (S1) 0.9822; (P) 0.9893; (R1) 0.9932; More...

Outlook in USD/CHF remains unchanged and intraday bias stays neutral. Further rally will remain in favor as long as 0.9779 support holds. On the upside, break of 1.0146 will resume larger up trend to 1.0283 projection level. However, firm break of 0.9779 will be a sign of reversal, and bring deeper decline back to 0.9478 support instead.

In the bigger picture, current development suggests that up trend from 0.8756 (2021 low) is still in progress. Sustained break of 1.0063 will target 100% projection of 0.9149 to 1.0063 from 0.9369 at 1.0283, and then 1.0342 (2016 high). For now, this will remain the favored case as long as 0.9779 support holds, even in case of deep pull back.

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.