Will ECB show discomfort with higher EUR? – Nomura

Analysts at Nomura explain that ECB officials’ comments suggest that differentiating the reason behind the EUR appreciation is crucial.

Key Quotes

“Mr. Cœuré said recent divergence between EUR and rate differentials could be evidence that the EUR’s appreciation is in response to an exogenous shock, not to positive growth. The sensitivity of EUR to rate spreads is indeed at historically high levels. The trend in EUR appreciation is consistent with the direction of rate spreads, but the reaction may be amplified by exogenous factors.”

“After a likely tapering announcement in October, the FX market’s interest in ECB policy may decline, which could reduce EUR sensitivity to rate markets. An adjustment in the speed of EUR appreciation is possible, but EUR’s high sensitivity to rates shows the direction of EUR is correct, especially as fundamental divergence suggests rate spreads are likely to catch up. We thus see further room for EUR appreciation.”