Eurozone may find it hard to soak up big rate hikes. German PPI decreased by over 4%...

EUR/USD has resumed its downswing and is in negative territory on Monday. In the North American session, the euro is trading at 1.0238, down 0.81%.

The ECB holds its final policy meeting of the year on December 15th, and it’s practically a given that the ECB will raise rates. But by how much? The current benchmark rate of 1.50% is low compared to other central banks, but the ECB is well aware that a weak eurozone economy will have trouble absorbing further oversize hikes. The ECB’s rate-tightening cycle has been steep, with an increase of 200 basis points in just three months. Still, inflation continues to soar, hitting 10.6% in October, up from 9.9% a month earlier. With inflation in double-digits, there is strong pressure to deliver a 50-bp increase next month. However, policy doves would like to see slower rates of 25-bp in order to minimize an economic slowdown.

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German PPI slides

There was a surprise from Germany’s PPI today, which fell by 4.2%, its first decline since May 2020. The consensus stood at 0.9%. Is the sharp decline a mere blip, or does it point to lower inflation in the eurozone’s largest economy? We’ll get a look at German and eurozone CPI reports next week, and a drop in inflation will raise speculation that inflation may have finally peaked.

The Federal Reserve’s barrage of hawkish statements from Fed members has chilled risk appetite and hopes of a Fed pivot. The US dollar has bounced back after taking a beating following the soft inflation report earlier this month. The Fed has long insisted that one or two reports showing inflation is lower does not make a trend, although risk sentiment has soared on every soft inflation report. If November’s inflation data is lower than anticipated, we can expect risk appetite to jump at the expense of the US dollar. The markets have priced in a 50-bp hike next month, although some Fed members have stated that a 75-bp move remains on the table.

EUR/USD Technical

• 1.0359 and 1.0447 are the next resistance lines
• EUR/USD is testing support at 1.0238. Below, there is support at 1.0150

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