Euro: Hawkish ECB and strong PMI cap downside – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad reports that EUR/USD has recovered part of its recent slump but remains below 1.1400. A stronger-than-expected Eurozone July PMI and a hawkish hold from the ECB support the Euro, though higher Oil prices keep growth risks skewed lower. Markets price around 75 bps of ECB tightening over the next year, seen limiting Euro downside rather than driving sustained gains.

Stronger PMI and ECB path support Euro

"EUR/USD recovered some of yesterday’s slump but is holding under 1.1400. The Eurozone July PMI was a lot stronger than anticipated. The composite PMI increased to a five-month high at 51.9 (consensus: 50.2, prior: 50.0) reflecting both a recovery in services business activity and a faster expansion in manufacturing production."

"Nevertheless, renewed oil price gains keep the risks tilted toward weaker Eurozone growth and higher inflation. That limits EUR/USD relief rallies."

"ECB delivered a hawkish hold yesterday. As was widely expected, the ECB left the policy rate unchanged at 2.25%. ECB President Christine Lagarde said the decision was unanimous, although some governors asked themselves whether a rate hike should be considered."

"The ECB is on track to lift rates 25bps at the next September 10 meeting (90% priced in). Over the next twelve months, the swaps curve implies nearly 75bps of tightening to 3.00%. That would leave the policy rate at the top of the ECB’s estimated neutral range (1.75%-3.00%)."

"Tighter monetary policy when the Eurozone economy is still operating below potential is more likely to limit EUR downside than push the currency higher because it raises the likelihood of a downward adjustment to ECB rate expectations."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)