EUR/USD trade may be stretched between 1.2200 and 1.2800 – BBH
|EUR/USD is consolidating above 1.1800. ECB publishes the Account of its June 5 policy meeting (12:30pm London), BBH FX analysts report.
ECB is concerned about the pace of EUR appreciation
"At that meeting, the ECB reduced the policy rate 25bps to 2.00%, as was widely expected. Only one Governing Council member didn’t support the decision to cut. Importantly, President Christine Lagarde’s stressed the ECB is likely 'getting to the end of the monetary-policy cycle.' Indeed, the swaps market implies just one 25bps rate cut over the next 12 months and the policy rate to bottom at 1.75%."
"The Account may offer insights into the discussion around the euro’s appreciation. A couple of ECB policymakers are becoming wary of the EUR/USD rally. On Tuesday, Vice President Luis De Guindos cautioned that EUR/USD gains beyond 1.2000 'would be much more complicated' while Governing Council member Martins Kazaks warned that further EUR appreciation could tilt the balance toward another cut. We believe the ECB is more concerned about the pace of appreciation than about the level."
"EUR/USD is overvalued and trading above our long-term equilibrium estimate of around 1.1100. However, EUR/USD has room to overshoot as the euro can play a greater role in foreign central bank reserves. Historically, 10% to 15% overshoot of equilibrium is not unusual, which would suggest EUR/USD could be stretched between 1.2200 and 1.2800."
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