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Market Extra: Euro slips as traders see ECB opening the door to slower rate hikes

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The euro dipped back below parity versus the U.S. dollar on Thursday as traders bet the European Central Bank will slow the pace of interest rate hikes after delivering another 75 basis point hike Thursday.

The focus Thursday was on the ECB’s policy announcement. While the ECB said it expected rates to rise further, it noted that with a ” third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation.”

Also, the ECB dropped a line from its September statement that said policy makers expected to lift rates over “the next several meetings.” Instead, the statement said the Governing Council took Thursday’s decision, “and expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target.”

The euro
EURUSD,
-0.96%

was down 0.8% to trade at $0.999 versus the U.S. dollar after climbing back above parity for the first time since late September earlier this week. The shared currency is down around 12% against a broadly stronger U.S. dollar in 2022 as the Federal Reserve has outpaced other major central banks, including the ECB, in aggressively raising interest rates and otherwise tightening monetary policy in its bid to get inflation under control.

“Overall, we view the mildly less hawkish guidance and widespread signs of a contracting eurozone economy as consistent with a smaller 50 basis point deposit rate hike to 2% in December, especially if CPI inflation recedes to any extent in the interim,” said Nick Bennenbroek, international economist at Wells Fargo Securities, in a note.

The Federal Reserve is widely expected to deliver a third straight 75 basis point rate hike when it meets next week, but speculation has mounted that policy makers could opt for a smaller increase in December. Expectations global central banks could begin to slow the pace of interest rates increases was reinforced Wednesday when the Bank of Canada delivered a smaller-than-expected half-point increase.

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