European markets got a late pick me up yesterday, closing at 5-week highs, after the Bank of Canada surprised the market by hiking rates by a less than expected 50bps, with Bank of Canada governor Tiff Macklem going on to admit that the central bank was placing a lot more emphasis on the effects of the slowdown when crafting rate strategy going forward. This could have implications if the Federal Reserve were to start thinking the same way next week, hence the selloff in the US dollar.

The Bank of Canada’s rate move yesterday was also significant in the context of the RBA’s dovish hike earlier this month. Both have housing markets which are being hit hard by the current pace of rate hikes and US housing data has been in freefall in recent months. Could this housing weakness also feed into the Fed’s deliberations as we head into year end.

Despite yesterday’s dovish move by the Bank of Canada it wasn’t enough to stop the S&P500 and Nasdaq 100 closing lower, as concern about tech earnings numbers continued to weigh on sentiment, as Meta Platforms became the latest tech giant to underwhelm on Q3 numbers, as well as its guidance.

Profits fell short of expectations, coming in at $1.64c a share, while adjusted revenues were slightly better at $27.24bn. Q4 revenue guidance also guided lower at $30bn to $32.5bn. The Reality labs division continues to haemorrhage cash, with revenues coming in at $285m, and losses coming in higher than expected at $3.67bn. How long before the size of these losses triggers a reality check, on operating expenses? On the plus side at least, its daily active users have remained resilient.

The inability of US markets to sustain yesterday’s rebound along with the negative reaction to Meta’s latest numbers looks set to see a lower open for European markets ahead of today’s key ECB interest rate decision.

At its last meeting in September, it was widely expected that the ECB would raise rates, with the only uncertainty being around whether they would go by 75bps or 50bps.

The decision to raise rates by 75bps was dictated by the upgrading of the banks inflation forecasts, which were adjusted higher to 8.1% in 2022 and 5.5% in 2023.

These targets now look incredibly dated given that we now have German inflation well above 10% and the EU headline rate also into double figures with core prices at 4.8% and likely to move higher.

A growing number of ECB policymakers have been increasingly vocal about the need for much higher rates, despite an acknowledgment that GDP is likely to fall quite sharply. The ECB cut its 2023 and 2024 forecasts, to 0.9% and 1.9% respectively, it raised its forecast for 2022 to 3.1%.

These GDP forecasts seem extraordinarily optimistic given the energy backdrop, and perhaps speaks to a certain amount of cognitive dissonance on the part of ECB officials.

The ECB said it expects to continue hiking in subsequent meetings, albeit probably at a slower pace than the Federal Reserve, although we’ve heard from several governing council members of the need to front load rises and move the headline rate back to 3%. This would be a huge move given the main financing rate is now, at 1.25%.

If the ECB does another 75bps today the effect on countries like Italy could well be problematic, and although yields have retreated from their recent highs we’ve already heard from the likes of new Italian Prime Minister Meloni who criticised the ECB’s recent decisions to raise interest rates by 125 bps since July, as the prospect of a recession looms. She isn’t alone either with French President Macron, also weighing in more subtly by warning the central bank about slowing demand to contain inflation.

These interventions are unlikely to stop the ECB from raising rates by 75bps to 2% later today, however with the surprise dovish hike from the Bank of Canada prompting speculation about a slowdown in the pace of rate hikes, ahead of next weeks Fed meeting, there is a sense that the ECB could well be late to the party.

Today really depends on not what the ECB delivers today, but what sort of guidance ECB President Christine Lagarde offers over future moves going forward for December, at a time when EU inflation is still showing little sign of slowing.

There is also the small matter of how the TPI program might work if needed, however with the way the EU economic outlook is unfolding its quite likely that inflation could fall quite quickly as demand starts to crater. This is the conundrum the ECB is wrestling with, with the hawks pushing for a headline rate of 3%, at a time when the bigger risk is cratering demand in the bloc’s largest economy, with Germany set to tip into recession by year end.

EUR/USD – broke above the October highs and the down trend line from the peaks this year, potentially opening the prospect of a move towards the 1.0200 area and the September highs. Support comes in at the 0.9980 area.

GBP/USD – broken above the 50-day SMA, and the 1.1500 area, and opening the possibility of a move towards 1.1740 and the September highs. Support comes in at the 1.1420 area.

EUR/GBP – looks set for a retest of the 0.8600 level and 100-day SMA, after breaking below the 0.8650 area and the 50-day SMA. Resistance remains back at the 0.8780 area.

USD/JPY – the slide in yields and the continued weakness in the US dollar has seen the Japanese yen continue to recover. Looks set for a retest of the lows this week at 145.50, while US dollar weakness prevails, with the 150.00 level likely to act as resistance.   

FTSE100 is expected to open 20 points lower at 7,036

DAX is expected to open 33 points lower at 13,162

CAC40 is expected to open 12 points lower at 6,264