Monthly Wrap: EUR – Euro firms as ECB continues raising interest rates

Philip McHugh October 27th 2022 - 2 minute read

Key takeaways:

  • ECB rate hike expectations push EUR higher
  • Escalating Russia-Ukraine war tempers the upside
  • EUR monthly lows: £0.85, $0.95, AU$1.48, NZ$1.68, C$1.31
  • EUR monthly highs: £0.90, $1.00, AU$1.57, NZ$1.75, C$1.35

The euro strengthened in late September after the flash Eurozone inflation rate exceeded forecasts, jumping from 9.1% to 10%, thereby prompting expectations of another 75bps interest rate rise from the European Central Bank (ECB).

However, Russia’s illegal annexation of four Ukrainian territories raised anxiety about a possible escalation of the war. These fears trimmed the single currency’s gains.

EUR faced mixed trade through the middle of October. An attack on Russia’s symbolic Crimean bridge heralded a new phase in the Russia-Ukraine war, with Moscow launching missile and kamikaze drone attacks on civilian and energy infrastructure.

These strikes continued through the month, keeping pressure on EUR and causing some choppy trade.

But despite this, the Euro was able to rise overall against many of its peers as ECB rate rise bets continued to strengthen. Policymakers hinted that further 75bps rises were appropriate in both October and December, thereby boosting EUR’s appeal.

The Euro then trimmed its gains, however, following the ECB decision. Although the central bank did hike by 75bps, the accompanying statement was less hawkish than anticipated. Traders began to pare their bets for future aggressive rate rises.

Looking at the month ahead, ECB policy predictions will likely continue driving the Euro. The Eurozone flash inflation rate for October will likely be a big driver of movement. If price pressures continue to intensify, EUR could rise as bets for another 75bps hike pick up again.

However, investors are increasingly concerned about the slowing Eurozone economy. An expected slowdown in the bloc’s third-quarter GDP growth rate could pressure the Euro. In addition, the November flash PMIs could create headwinds if they once again reveal a deepening contraction in business activity.

All the while, Russia-Ukraine news could trigger more volatility. If the conflict continues to escalate, EUR may face selling pressure. Conversely, any improvement in the outlook of the war could support the single currency.

Written by
Philip McHugh

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