Euro buyers await ECB rate decision, GBP benefits from UK political solution

On Monday, there is a prospect of European stocks gaining ground although Asian shares struggled amid China’s data. To qualify for the ballot, UK leadership candidates need to prove that they have received the support of at least 100 MPs by 2 pm on Monday. Investors will be also waiting for the French and German PMIs. The UK PMI is also included in Monday's data.

GBP benefiting from the UK political solution

Following the endorsement of Chancellor of the Exchequer Jeremy Hunt and the withdrawal of former Premier Boris Johnson from the contest, Rishi Sunak took a significant step towards becoming the next Prime Minister of the United Kingdom. Shortly after Johnson said he wouldn't run for the No. 10 Downing Street In light of the fear of dividing the Conservative Party, Sunak said in a statement on Twitter late Sunday, he would lead the party with "integrity, professionalism, and accountability". Sunak faces House of Commons Leader Penny Mordaunt in what is now a two-person race. During the past few weeks, the pound has benefited from the expectation that a potential premiership under Sunak, who was a former chancellor, could be a catalyst for the nation's financial recovery.

ECB meeting in the spotlight

It is expected that the European Central Bank will raise interest rates again this week, in anticipation of a more substantial hike in rates as attention gradually shifts to how high the bank will eventually hike. With inflation at 10%, the ECB will likely increase the deposit rate by three-quarter points for the second time in a row on Thursday, bringing it to 1.5%. Such an increase appeared inconceivable at the beginning of the year but has now become the norm after three such increases by the Federal Reserve. Many people do not believe that this will be the final destination. Nevertheless, investors and economists are concerned about how far the rates can be lifted given the threat of a recession caused primarily by the energy that threatens to overwhelm the eurozone and the fact that households are experiencing higher heating and mortgage costs.

Euro in a broader picture

All of the problems in the eurozone are rooted in the energy crisis, and a weak Euro increases the cost of importing energy even further. That's not what the ECB is looking for at all. There is a strong desire on the part of the ECB not to let the euro devalue greatly. Therefore, it would be ideal if it could set a floor beneath the euro. As of this point, they want to defend the Euro as much as possible. This can be accomplished in several ways. The easiest way to get out of this jam is to pave the door to a higher terminal rate. Currently, the markets predict that the ECB will raise interest rates to around 3 per cent, and that will be the peak. This would be a hawkish surprise if Lagarde revealed the peak might be a tad higher than 3 per cent. They do not wish to overdo it, since that might cause panic in the bond markets, as we saw in the UK. They want to avoid this, as well as prevent any further depreciation in Europe. Here is a more comprehensive look at the Euro from a broader perspective. There has been a substantial decline in the price of gas in Europe recently.

Therefore, it would appear that the energy crisis is on the verge of easing up and the winter might not be Armageddon after all. Having said that, we're probably still going to face a recession, but perhaps it will not be as severe as investors thought it will be in the beginning. Because the ECB rather wants to defend the Euro at this point, and that energy prices are finally heading in the right direction, it seems there is some good potential for the Euro from these depressed levels to move up within its falling channel towards the 50-Day EMA, but not a V-shape reversal. For a trend reversal to occur, we would also need to see a pivot from the Federal Reserve, which would also weaken the dollar. While we aren't there yet, a relief rally is quite feasible in the near future.