Economists at Commerzbank analyze EUR outlook after the ECB’s rate hike last week.
A significantly weaker Euro entails the risk of increasing the upside pressure on inflation
Fundamentally the ECB delivered exactly what had been largely expected for the September meetings of the central banks: a rather clear signal that rate hikes will end. By doing so the ECB accepted a certain level of risk. After all, it had to lead the way, as the Fed and the other major central banks are only meeting this week. If these central banks send out a less clear signal that the end of rate hikes is imminent for them too, the Euro might get under stronger depreciation pressure again.
That would constitute a problem for the ECB as a significantly weaker Euro also entails the risks of increasing the upside pressure on inflation, which would no doubt rankle the ECB central bankers in view of continued uncertainty about the future development of inflation rates.
It is comforting to know that that is exactly what we – and the market – are not expecting to happen. With the exception of the Bank of Japan of course and the Riksbank, ‘one and done’ is the most that we expect from the central bank decisions this week and that has been priced in. Any deviation from that is therefore likely to lead to more notable exchange rate fluctuations.
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