Euro: Rate support seen fading gradually against US Dollar – MUFG

MUFG’s Derek Halpenny says the ECB’s latest communication supports a likely September rate hike, now almost fully priced, but warns that Euro support may fade as energy costs rise. He sees increased downside risks for the Euro versus the Dollar, with EUR/USD’s break below 1.1400 and weaker European data contrasting with a more resilient US economy.

ECB path priced as Euro risks grow

"The ECB message yesterday in our view certainly pointed to the prospect of another rate hike in September. While the statement acknowledged that energy prices remain close to baseline assumptions, the comment that the “full inflationary impact of the energy shock has yet to play out” gave some balance with concerns still elevated over achieving price stability."

"Bloomberg released one of its sourced articles (from people familiar with the matter) confirming a hike in September unless the inflation outlook improves “markedly”. The fact that some Governors considered whether a hike was needed yesterday reinforces the prospect of a September hike."

"Who knows how the Middle East pans out but even if crude oil prices start to decline again, we are unlikely to see a marked improvement in the outlook by then and hence a hike from the ECB is very likely, consistent with our call. That’s close to fully priced now."

"The US dollar gained broadly yesterday but we certainly see increased downside risks for the euro and the pound if the energy markets continue the current pace of increases. One energy space that looks increasingly different is the natural gas market with prices surging and are already have hit the peaks in March."

"Momentum points to further gains for the US dollar while technically the clearer break of 1.1400 in EUR/USD adds to short-term bullishness. The previous high for DXY at 101.80 is now in sight and a break there would be another bullish sign."

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