EUR/USD: Narrowing yield differentials and weaker external sentiment likely to weigh on the Euro – HSBC

The ECB raised its key policy rate by 25 bps to a record high of 4% in September, while consensus was fairly evenly split. The EUR failed to make any notable gains, despite the rate hike. Economists at HSBC expect a weaker EUR ahead.

Lower for longer

The statement supports our view that rates may have peaked and could remain at current levels for some time. At the press conference, ECB President Christine Lagarde refused to say that rates had peaked but conceded that the focus was now likely to shift to duration of restrictive policy rates. And while the ECB may well try to push a ‘higher for longer’ mantra for its rates outlook, for the EUR it seems clear to us that the path is now ‘lower for longer’.

A shift lower in EUR rate expectations from here, alongside the potential for US rate cuts to be priced out of the market, makes downside potential for EUR/USD most compelling. The external environment also does not appear to offer much solace for the EUR, with ongoing signs of global growth slowdown, amid the impact of monetary tightening.