EUR/USD Looking at EURUSD’s chart, we can see that EUR lost ground against the USD and it feels at the lowest level for the week, at the current rate of 0.971. If today it will not manage to hold the rate above the level of 0.97, then we could see it dropping towards the level of 0.9640 otherwise it should upwardly react toward the level of 0.9760.

The big revelation - From delusions to reality Twenty years ago, the single European currency was born to bridge nations and open new paths for European integration. The spread between the government bonds of the member states that adopted the single currency and those of Germany decreased almost to zero, even for countries like Greece, Italy, Spain, and Portugal, which will be tested by the financial crisis a few years later. In fact, since 2001, the member countries of the euro agreed to a Stability and Growth Pact (SGP) where all were obliged to ensure that member countries pursue sound public finances and coordinate their fiscal policies. In return, all members enjoyed the cost of borrowing as Europe's powerful economies since they would borrow at roughly the same interest rates as Germany. And this was done until 2008, as seen in the diagram below. But a few years later, with the financial crisis of 2008, everything changed. It was revealed that member states had effectively built foreign currency debt. This was true because they could not print money in Euros to avoid bankruptcy due to the high debt they had incurred. If they could do so, such a move would obviously create high inflation and currency depreciation conditions, but the member state would avoid bankruptcy. But that didn't happen. The eurozone had changed its face and became strikingly different. As Greece, Portugal, Spain, and Italy could go bankrupt, spreads on their government bonds shot up to extremely high levels. To avoid bankruptcy and exit from the eurozone, and since they couldn't print money, they were forced to be supported by the ECB, the EU and, in some cases, the IMF in exchange for significant cuts in public financial spending. The austerity demonstrated by Europe led to the escalation of social reactions and the rise of populism and nationalism, not only in the economically weak member states. The uncertainty lasted for quite a long time. However, things in Europe finally calmed down when ECB President Mario Draghi said the historic phrase: "he would do everything in his power to preserve the euro". The European Central Bank has introduced Outright Monetary Transactions (OMT), a program under which the bank makes purchases on secondary markets of government bonds issued by eurozone member states. The program was accompanied by conditions of the discipline of euro member governments. Its existence was enough to reassure investors. Everything flows - The European debt is mutualised And while the countries since 2015 were trying to find a stabilization model, a few years later came COVID-19, which brought even more significant changes to the Eurosystem. The lockdown once again created the risk of bankruptcy in some member states, as according to the stability programs they followed, they were obliged to have small deficits or surpluses to be financed by the European Stability Mechanism. Policymakers to avoid a new round of social and financial uncertainty in the eurozone took a remarkable decision; all member states could run a public deficit of more than 3 per cent of GDP, thus offering financing to all member states for as long as needed due to the effects of the pandemic. With the end of the pandemic on 21 July 2022, the Governing Council of the ECB, in order to fulfil its primary mandate, which is Price Stability, approved the establishment of a Transmission Protection Instrument (TPI) in order to ensure that the direction of monetary policy is transmitted smoothly to all euro area countries. The TPI can be activated to address unwarranted, disorderly market developments if these pose a serious threat to the smooth transmission of monetary policy across the euro area. In such a case, the Eurosystem can buy securities from individual countries in order to combat a deterioration in funding conditions that is not justified by the country's fundamentals. This means that the central bank, unlike in the past, when the Eurosystem bought bonds of member states according to the specific weight each member has in the common currency, today in order to achieve price stability, can and does selectively buy bonds from each member state, regardless of its specific weight in the euro. In simple words, that means it mutualises the debt of the member states. This undoubtedly constitutes a considerable change in policy for Europe. Eurobonds are here impacting euro and investment opportunities In conjunction with NextGenerationEU (NGEU), the EU's long-term budget confirms the significant changes that will take place in Europe. It is the most extensive stimulus package ever financed in Europe. The funding program was designed to stimulate recovery after COVID-19. A total of €2.018 trillion in current prices is helping to rebuild Europe by making it greener, more digital, and more resilient. The program initiators say that "this is more than a recovery plan. It is...

USD/JPY rallies as BoJ might stay dovish The Japanese yen weakens as quantitative tightening remains a remote prospect. As its currency sank to a 32-year low, the Bank of Japan’s ultra-loose monetary policy has become increasingly at odds with the finance ministry’s view. The central bank may still deem it premature to shift away from the status quo given heightened global uncertainties. The latter, however, concerned by the yen’s unidirectional slide and its negative impacts on corporations, may choose to intervene in the market again, popping up short-term market moves. The greenback is heading towards 155.00 with 144.00 as the closest support. EUR/USD slips as energy crisis hinders inflation fight The euro remains under pressure as the ECB is expected to raise rates by 75bp. The energy price pressure in the euro zone has been a significant headache for policymakers. With inflation reaching five times the ECB’s target last month, the central bank may have little choice but to go down the path of rapid rate increases. However, unlike other major peers, the ECB will need to keep bond spreads in check or risk another debt crisis in peripheral countries. Needless to say, such a rock and hard place situation makes the euro hardly an attractive asset to hold onto. 0.9540 is a fresh support and parity (1.0000) is a psychological hurdle. USD/CAD steadies ahead of BoC hike The Canadian dollar struggles as the risk appetite ebbs and flows. Consumer price pressures in Canada remain high and above forecasts despite a slight deceleration in September, which would call for another large-sized rate hike by the BoC this week. A 50-basis point hike would be the bare minimum while markets are leaning towards a 75bp move. Still the central bank’s hawkish stance might not be enough to shift overall sentiment. A recovery in oil prices temporarily offers the commodity-linked currency a little edge against the greenback. 1.3500 is the first support and 1.4300 could be the next target. S&P 500 falls as Fed remains hawkish The S&P 500 slides as investors refrain from adding risk. Upbeat quarterly earnings offer stocks limited support as bearish sentiment continues to drive the price action. Hawkish comments from Fed officials mirror strong US job data and high inflation, reinforcing expectations the central bank will not divert from its aggressive path. With cash offering historic risk-free returns these days, most investors would like to see signs inflation is slowing down before jumping in with both feet. Until then, sporadic rallies would only feed the bears. The index may tank to a two-year low at 3280 with 3800 as the immediate resistance.

All eyes will be on the European Central Bank meeting next week. We think a 75bp hike looks like a done deal. The PMI survey on Monday will also be closely watched, providing clues on whether the eurozone economy has contracted even further. For the Bank of Canada, we expect a similar 75bp rate hike, given the upside surprise in inflation. US: The Fed cannot slow the pace of hikes yet There are lots of important numbers out for the US next week, but none are likely to change the market's forecast for a 75bp interest rate hike on 2 November. 3Q GDP is likely to show positive growth after the “technical” recession experienced in the first half of the year. Those two consecutive quarters of negative growth were primarily caused by volatility in trade and inventories, which should both contribute positively to the 3Q data. Consumer spending is under pressure though while residential investment will be a major drag on growth. We are forecasting a sub-consensus 1.7% annualised rate of GDP growth. We will also get the Fed’s favoured measure of inflation, the core personal consumer expenditure deflator. This is expected to broadly match what happened to core CPI so we look for the annual rate to rise to 5.2% from 4.9%. With the economy growing and inflation heading in the wrong direction, the Fed cannot slow the pace of hikes just yet. Also, look out for durable goods orders – Boeing had a decent month so there should be a rise in the headline rate although ex-transportation, orders will likely be softer. We should also pay close attention to consumer confidence and house prices. The surge in mortgage rates and collapse in mortgage applications for home purchases has resulted in falling home sales. With housing supply also on the rise, we expect to see prices fall for a second month in a row. Over the longer term, this should help to get broader inflation measures lower given the relationship with the rental components that go into the CPI. Canada: A 75bp hike is the most likely outcome In Canada, the central bank is under pressure to hike rates a further 75bp given the upside surprise in inflation. Job creation has also returned and consumer activity is holding up so we agree that 75bp is the most likely outcome having previously forecast a 50bp hike. UK: Markets looking for clarity on fiscal plans and government stability The ruling Conservative Party has said it will fast-track plans to get a new leader in place by next Friday - and potentially even by Monday if only one candidate makes it through the MP selection round. Candidates have until Monday at 2pm to clear the hurdle of 100 MP nominations to make it onto the ballot paper, before Conservative MPs vote on the outcome. With only a week to go until the Medium Term Fiscal Plan on 31 October, there's inevitably a question of whether this is enough time for a new prime minister to rubber stamp Chancellor Jeremy Hunt's plans for debt sustainability. Investors are - probably rightly - assuming that Hunt will remain in position under a new leader. But the bigger question is whether the Conservative Party can unite behind a new leader and whether a more stable political backdrop can emerge - because if it can't, then not only is there uncertainty surrounding future budget plans, but also whether we're moving closer to an early election. Eurozone: ECB to hike by 75bp again amid ongoing inflation concern The hawks have clearly convinced the few doves left of the necessity to go big on rate hikes again. Contrary to the run-up to the July and September meetings, there hasn’t been any publicly debated controversy on the size of the rate hike. In fact, European Central Bank President Christine Lagarde seems to have succeeded in disciplining a sometimes very heterogeneously vocal club. To this end, it is hard to see how the ECB cannot move again by 75bp at next week’s meeting. As the 75bp rate hike looks like a done deal, all eyes will also be on other, more open, issues: excess liquidity, quantitative tightening and the terminal interest rate. Besides the ECB, which will be the key focal point for eurozone investors, we’re looking at the survey gauges of the economy next week. The PMIs on Monday will be critical to determine whether the eurozone economy has slid further into contraction or whether an uptick has occurred. There is not much evidence on the latter in our view, but Monday will provide more clarity on how the eurozone economy is performing in October. Key events in developed markets next week Source: Refinitiv, ING Read the original analysis: Key events in developed markets next week

UK Prime Minister Liz Truss stepped down this week after only 44 days in the office. The resignation follows heavy pushback on the 'mini-budget' presented in late September, which sparked fears of even more persistent inflation and much stronger rate hikes by the Bank of England. The new chancellor Jeremy Hunt has already overturned many of the spending measures introduced in the mini-budget, which has supported GBP and eased the pricing on BoE hikes. Going forward, the conservative party aims to find a new PM already next week, and the process begins by conservative MPs voting to select two final candidates on Monday. Then, the party members will cast the final deciding vote by Friday October 28 at the latest, or alternatively the less popular of two withdraws without a vote by the party members. At the time of writing, former chancellor Rishi Sunak is the most likely candidate followed by the former Prime Minister Boris Johnson. The European Council agreed on joint measures to limit energy prices largely in line with the earlier proposal by the Commission. While details still remain uncertain, the measures include 'a dynamic price corridor' to limit further rises in gas prices despite the earlier pushback by Germany. In addition, EU will work to set up a mechanism to cap the price of gas used for electricity generation, to create a new benchmark for gas prices and to create a voluntary joint purchasing platform (see details here). Spot gas prices have eased to the lowest levels since the start of the war as inventory levels are now close to full in most EU countries, but long-term solutions to replacing Russian gas still remain uncertain. Market sentiment has remained cautious not least on the back of the UK political uncertainty. US 10y bond yields have reached new cycle highs above 4.20%, but in contrast to the rise seen earlier this year, the most recent uptick has been driven largely by higher inflation expectations - a worrying development for the Fed in light of the persistent upside surprises in realized inflation. FOMC silent period begins on Saturday, this week's communication has supported our call for 2x75bp hikes in the last two meetings of the year. Next week, we expect the ECB to hike its policy rates by 75bp. The move is fully priced in by the markets, so focus will be on communication. We expect Lagarde to acknowledge that the risk of the September's downside scenario materializing has increased (-0.9% growth in 2023). In addition, markets will focus on comments about ECB potentially ending APP reinvestments next year to complement the liquidity tightening from maturing TLTROs. See our full preview: ECB Preview - Focus on the technicalities, 19 October. In contrast, Bank of Japan embarked on emergency bond buying this week, and we see no tightening indications ahead of next week's policy meeting. We will look out for further FX intervention to stem the yen slide, but as global yields continue to rise, so does the pressure on BoJ, which seems determined to defend its yield curve control. On the data front, markets will focus on the October Flash PMIs on Monday. We expect further signs that euro area is sliding towards a recession already this year, while US growth remains modestly positive. On Thursday, we see upside risks to our forecast for the US Q3 Flash GDP at +1.1% q/q AR, as the recent sharp decline in imports could have boosted net exports more than anticipated. Download The Full Weekly Focus

A central bank extravaganza lies ahead. The show will kick off with the Bank of Canada meeting, where markets expect another rate increase but are split on the size. Meanwhile in Europe, a triple-barreled hike by the ECB is already locked in, putting the emphasis on the press conference. Finally, the Bank of Japan is unlikely to throw a life jacket to the sinking yen.