The European Central Bank held its meeting on Thursday. It announced the end of the purchase program (APP) by July 1st, kept interest rates unchanged as expected, and said it intends to raise rates in July by 25bp. Analysts at Danks Banks point out risks are still skewed for more than one 50bp rate hike, but with the current very uncertain outlook, we expect the economic outlook will dampen the medium inflation pressure, paving the way for ‘only’ 25bp hike. They still see the EUR/USD pair moving toward 1.00.
“For EUR/USD, ECB is provided some well-sought after clarity as to the entire likely policy path in to and including Q4. Further, this guidance appear quite in line with the market’s view. We are seeing a mild widening of credit spreads (higher Italian rates vs Germany) and during the press conference, and EUR/USD unwound some of the initial strength – likely due to the credit/risk aversion channel. This is well in line with the observation that FX strength upon hawkish central banks has faded rather fast and we have recently seen that in SEK, AUD and Eastern Europe. Also, EUR strength on ECB guidance has faded multiple events in the last 3-6 months.”
“In our view, this ECB meeting confirms our view that rate hikes are a global phenomenon intended to make markets rotate towards less risky positions and a lower EUR/USD spot is part of such a rotation. For Europe, widening spreads is also crucial to why EUR/USD heads south as we price in higher rates. Looking ahead, we continue to see EUR/USD towards 1.00 in 12m.”
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