Euro: ECB credibility may offer support against Dollar – DBS

DBS Group Research’s Philip Wee argues that the Euro has a subtle advantage over the Dollar this week, as the European Central Bank’s recent hikes and focus on inflation underscore its institutional credibility. In contrast, the Federal Reserve’s stance is clouded by political pressures and lack of forward guidance, leaving EUR/USD sensitive to any Fed disappointment on rates and yields.

ECB credibility supports Euro

"The EUR has a subtle advantage over the USD this week. Last week’s governing council meeting reinforced the European Central Bank’s willingness to deliver the monetary policy needed to return inflation to target. Despite two hikes in June and September, the EUR-positive case is less about the ECB’s hawkishness than its institutional credibility."

"Faced with resurgent oil prices, the ECB has prioritized above-target inflation over the risks to a resilient Eurozone economy. Fiscal concerns remain in France and Italy, but the ECB appears less constrained by domestic political considerations."

"The contrast with the Fed is becoming hard to ignore. Fed Chairman Kevin Warsh has similarly stressed the need to restore price stability, but his rejection of forward guidance has left markets with less clarity over the Fed’s reaction function."

"Hence, a hawkish Fed is no longer unambiguously USD-positive."

"With a US rate hike now heavily discounted, a Fed hold would force a potentially sharp repricing, pulling the USD lower."

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