The ECB still sounding hawkish

Technical Analysis for EUR/CHF – Buying the Post ECB Retreat

Posted Thursday, October 27, 2022 by
Skerdian Meta • 2 min read

EUR/CHF used to be quite bearish for years and it fell below parity in June, as Europe was heading into an energy crisis, while prices were surging and still are. Consumer inflation is much lower in Switzerland at around 3% while in the Eurozone it has reached 10%, with the economy heading into a recession.

But, at the end of September, we saw a strong bullish reversal as the sentiment improved and the Euro started turning bullish. Since then, this pair has gained more than 5 cents, approaching parity today before the ECB rate decision. They delivered on expectations, raising interest rates by 0.75%, taking them to 2.00%, but the comments from Christine Lagarde signalled slower hikes ahead, which sent the Euro 100 pips lower earlier.

EUR/CHF H1 Chart – MAs Holding As Support

The retreat seems complete on the H1 timeframe

Scripted Comments from ECB’s Christine Lagarde

  • We have made substantial progress in withdrawing accommodation
  • Inflation remains far too high
  • Consumer and business confidence has fallen rapidly
  • Expect further economic weakening in remainder of this year and next year
  • Expect economy to slow down substantially over remainder of the year
  • Cites weaker global demand and also due to tighter monetary policy
  • The post-pandemic rebound in services demand is slowing
  • Labour market performed well but somewhat higher unemployment possible as economy slows
  • Inflation-shielding should be targeted at the most vulnerable
  • Risks to economic outlook clearly on the downside, cites war, supply disruptions and weakening world economy
  • Risks to the inflation outlook are primarily on the outside, led by retail energy prices
  • A weakening of demand would lower prices pressures
  • Bank lending to firms remains robust
  • We expect to raise interest rates further
  • With this third major hike in a row, we have made substantial progress in withdrawing accommodation
  • Future decisions will continue to be data-dependent and we stand ready to adjust all instruments

German 10-year yields fell as low as 1.99% as ECB President Christine Lagarde downplays the need for more rate hikes. The ECB statement removed the guidance for ‘several’ more hikes and Lagarde said they will take it meeting by meeting while acknowledging there will be at least one more hike.

On net though, the market isn’t convinced that hikes are coming and the terminal top is now pricing around 2.7% vs 2.9% previously. The market is giving the ECB plenty of room here to do its job and not doubting that inflation will come down. That’s a nice setup for European assets. The risk is that inflation runs again and the ECB is forced to re-commit to rate hikes.

EUR/CHF Live Chart

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