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European Central Bank interest rates, explained By Forex Forum.
The European Central Bank (ECB) will raise interest rates in December says Deutsche Bank, a call that could offer Euro exchange rates support going forward.
Deutsche Bank's Chief Economist Mark Wall says he now expects the ECB to initiate policy rate liftoff with a 25bp hike in December 2022.
The call is in line with investor expectations, as implied by money markets, for a rate rise by year-end.
"If our baseline ECB forecast materialises without an acceleration in our projected Fed hiking cycle, our strategists would expect EUR/USD to rise materially above 1.20 by next year," says Wall.
On Monday, Markit published the latest flash manufacturing and services PMI numbers. According to the company, the Eurozone manufacturing PMI increased from 58.0 in December to 59.0 in January. This increase was better than the median estimate of 57.5.
On the other hand, the closely watched services PMI declined from 53.3 in December to 51.2 in January. This drop helped to push the composite PMI from 53.3 to 52.4.
Meanwhile, in the United States, the manufacturing and services PMIs declined to 55.0 and 50.9, respectively.
These numbers show that the Omicron variant had a negative impact on the two economies in January. However, analysts expect that the situation will improve in the coming month as the impacts of the variant starts fading.
The EUR/USD pair also declined because of the rising tensions between Western countries and Russia. Russia has accused the US and other western countries of pushing Ukraine to join NATO. As a deterrence, Russia has pushed more than 100k troops near the Ukrainian border.
On the other hand, USD has scored outsized gains against currencies sensitive to the global business cycle and market sentiment (AUD, NZD, CAD).
Defensively-minded currencies (EUR, CHF, JPY) have held up markedly better, though the shift in Fed views has allowed the Greenback a modest overall advance.
This is despite the former group looking set to match the four interest rate hikes now expected of the Fed in 2022. Meanwhile, the latter set is seen sustaining negative-interest-rate policies at least until next year. This preference for relative 'safety' over returns underscores the markets' risk-off disposition.
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