Euro: Yield support into ECB decision – MUFG

FXStreet Insights Team FXStreet

MUFG’s Lee Hardman highlights that EUR/USD has been gradually moving higher, supported by more energy-sensitive European yields and expectations of a hawkish ECB. The pair has moved back above its 200-day moving average near 1.1635, with markets almost fully pricing another rate hike by December, raising the bar for a hawkish surprise from the ECB.

Hawkish expectations priced in

"Market attention will now shift to the ECB’s policy update later today. EUR/USD has been drifting higher at the start of this month moving back above the 200-day moving average at around 1.1635 ahead of today’s ECB meeting."

"Market participants are anticipating a hawkish policy update from the ECB today taking into account higher energy prices over the summer and the resilience of the euro-zone economy to the energy price shock so far this year. The developments will provide justification for the ECB to deliver a second hike of the current tightening cycle. It will lift the policy rate up to the top of the ECB’s estimated range for the neutral policy rate of 1.75%-2.50%."

"The performance of the euro in response to the ECB’s policy update will depend more on how strongly the ECB signals that further rate hikes are likely to be required. We have been forecasting that the ECB would be more reluctant to move rates into restrictive territory, but acknowledge that the latest unfavourable energy price developments will add to policymaker concerns over potential second round inflation effects. The euro-zone rate market is already almost fully priced for another hike by December so there is a high hurdle for a hawkish policy surprise."

"European yields have proven more sensitive to higher energy prices over the summer than yields in the US, which continued again yesterday with the 2-year US Treasury yield increasing by around 4bps. It is one reason why EUR/USD has been moving gradually higher over the last couple of months."

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

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