The European Central Bank is expected to hold its much-anticipated meeting today and raise interest rates by 0.75%. Although, after yesterday’s slowdown by the Bank of Canada which raised rates by 0.50% against 0.75% expected, traders are being cautious, as they sense a pivoting time in central banks policy. After such massive rate hikes, it has come time for them to slow and stop at some point soon.

Traders are sensing that that point in time is approaching. Will we see the same scenario by the European Central Bank today? The ECB is expected to raise interest rates by 0.75% and I think that they will deliver on that since they started late compared to other major central banks, but the question is after that, since the Eurozone economy is heading deeper into contraction, as we saw in the data of the last two weeks.

EUR/USD H4 Chart – Pushing Above Parity Ahead of the ECB

Is the trend changing for EUR/USD? 

Comparing the Eurozone to Canada, CIBC didn’t change its forecast for a terminal rate of 4.25% from the Bank of Canada in light of today’s hike to 3.75% versus 4.00% expected, but they did note lower growth forecasts.

“The statement and downgraded growth forecasts within the MPR hint at an economy that is losing momentum maybe a little quicker than previously anticipated. Housing is seen to have retreated ‘sharply’ but there was also reference to consumer and business spending softening, as well as weaker international demand,” economists wrote.

The question beyond the final rate level, either 4.25% or 4.00%, is how long the Bank of Canada will stay there and what they will do after, resume hiking again or reverse to loosening the policy as the economy heads into a recession?

“While the Bank of Canada slightly under-delivered today in terms of the size of rate hike delivered, its downgraded view of potential growth and continued commitment that interest rates ‘will’ need to rise further doesn’t suggest to us that the peak in interest rates will be any lower than we were expecting heading into today’s announcement. The press conference opening statement suggested that we are getting closer to the end of the hiking cycle and that, barring a large surprise, steps of 75bps are now behind us. This is consistent with our forecast of a peak rate of 4.25%, and that rates will have to stay at that level at least through the end of 2023 to help bring inflation back down to target.”

So, if ECB’s focus shifts more toward the economy rather than inflation, then they will soon start to pivot the policy, which would be quite bearish for the Euro. Therefore the statement and the press conference will b very important to follow and we will cover them live on our economic calendar where you can follow.

EUR/USD Live Chart