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Fed’s Powell declares the tapering process could start in November.

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Miguel A. Rodriguez
Miguel A. Rodriguez
05 November 2022
The EUR/USD loses upside force, keeps on declining and struggles for direction.

The German IFO business climate index published yesterday continues to decline. The index recorded its peak in June at 101.7, then started weakening as it reached 97.7 in October, and 98.9 in September.

Everything indicates that the German economy, and the European economy, are not in their best moments. Both are facing slowdowns for different reasons, with this also being pointed out by the IFO institute and the Bundesbank.

The IFO economist has declared that the German economy will only grow about 0.5% in Q4 due to supply chain problems limiting acquisitions and leading to a collapse of productive capacities – the main reasons the problems in industrial sectors are still virulent.

Relatedly, in its latest monthly report, the Bundesbank argued that the service sector is slowing down considerably, and industries continue to suffer from serious supply problems, which is why the forecasts for the GDP growth for the entire year is significantly lower than the 3.7% forecast in June.

However, the German Central Bank was surprisingly less concerned about the recent rise in the price level. Although it can be sustained for the time being, there will be gradual reductions over the next year.

According to the analysis and forecasts of these two prestigious institutions, the European Central Bank will have no significant problem in the next meeting of the governing council to maintain a dovish bias for its monetary policy.

Regarding the current scenario, what can be surprising is if the market witnesses a more dovish approach than expected. This could be seen in case they announce an extension of the emergency pandemic purchase program, or through a clear conviction about the temporary nature of the price increases. In turn, this would remove the possibility of an interest rate increase in the short/medium term.

This situation became critical only a couple of months ago, as investors discussed the ECB's monetary policy changes. This also included the reductions in its asset purchase program, and even future interest rate hikes, causing the 10-year German bond to rise to -0.07% from the minimum of -0.50%, partly caused by the correlation with the North American bonds.

Because of this, the American Citibank kept its bearish vision for the euro in the coming months, and due to the Fed’s imminent announcement regarding the start of the tapering process, on November 3rd.

EUR/USD  lost more than 30 pips and fell back after last week’s bullish correction, finding its first major support at the 1.1575 area.

 

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Sources: Bloomberg, Reuters

This information/research prepared by Miguel A. Rodriguez does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views and consequently any person acting on it does so entirely at their own risk.The research provided does not constitute the views of KW Investments Ltd nor is it an invitation to invest with KW Investments Ltd. The research analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.The research analyst in not employed by KW Investments Ltd. You are encouraged to seek advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit that conforms to your specific investment objectives, financial situation, or particular financial needs before making a commitment to invest. The laws of the Republic of Seychelles shall govern any claim relating to or arising from the contents of the information/ research provided. 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.