Geopolitical Woes

Geopolitical fears in the European continent were re-ignited, as a missile fell inside Poland yesterday, killing two citizens. The Foreign Ministry of the NATO-country talked of a "Russia-made" missile, summoning the Russian ambassador. ^[1]

NATO consultation under article 4 could be triggered, while Article 5, stipulates that an attack against one Ally is considered as an attack against all Allies ^[2]. Western leaders however, appeared measured and level-headed, helping ease worries. US President Biden said it is "unlikely" that the missile was fired from Russia.

Encouraging EZ Data & Soft US Inflation

The European economy avoided a contraction in the third quarter, as Tuesday's preliminary data showed (second reading). GDP grew by 0.2% quarter-over-quarter, while Q2 Final print was +0.8%.

The European Central Bank (ECB) expects an economic stagnation in the second half of 2022 and the first quarter of next year. It does not forecast a recession though, unless there are "more severe disruptions to European energy supplies", but the current mild weather is helpful. ^[4]

US factory-gate inflation dropped in October, as the Producer Price Index came in at +8% year-over-year, from 8.5% previously. This comes after last week's soft Consumer inflation report, which showed a moderation of headline CPI to 7.7% y/y and the lowest level since the start of the year.

Monetary Policy Differential

The US Federal Reserve has delivered a massive 375 basis points worth of rate hikes since the March lift-off in order to control inflation but has hinted at slowdown of the pace, given the lagging nature of these actions.

Last week's CPI report led to a dovish repricing of market expectations around the Fed's rate path, with CME's Fed Watch Tool currently assigning the highest probability to a terminal rate of 5.00%, from 5.25% previously. ^[5]

Since then, we have seen a series of commentary, which reveal some division amongst policy makers, which is understandable, since they will have the chance to assess two more inflation reports until their next decision in mid-December.

The European Central Bank was late to tighten its policy, but has done so emphatically, with the most aggressive rate hike cycle in its history. It has not provided a clear picture of where it is looking to take rates, but it is clear that it looking to more increases. Mr Villeroy talked of raising them beyond 2% yesterday, from 1.5% currently, according to Reuters. ^[6]

EUR/USD Analysis

The USDOLLAR is having difficulties during the current quarter and the dovish shift in market expectations around the Fed's tightening path, has created renewed pressure recently. Along with mostly hawkish commentary from ECB officials, the common currency has been able to benefit and stage a notable recovery.

EUR/USD comes from its best week in more than two years, trading above the 23.8% Fibonacci of the 2021 High/2022 Low plunge. This gives it the chance to push for the 38.2% level (10.609), but does n0t look yet ready for a broader recovery towards and beyond 1.7087.

On the other hand, the advance looks stretched and the pair shows indecision around the 200Days EMA, while previous market hopes for a peak in US Inflation and Fed hawkishness have proven ill-advised. As such, there is scope for a return back to 1.0199, but a strong catalyst will be needed for moves below parity and the EMA200.

The recent visits above parity were short-lived, but EUR/USD seems better positioned now to defend this region. For the next leg of the move markets will be looking to today's US Retail Sales, tomorrow's Eurozone inflation figures and any commentary from Fed and ECB officials.