Euro: Limited Policy Divergence Underpins Support Against US Dollar – BBH

EUR/USD has recovered above 1.1200. Brown Brothers Harriman’s Elias Haddad attributes the rebound to the ECB’s pause and pushback against aggressive market expectations for tightening. Robust Eurozone GDP and forecasts for above-target inflation leave a December rate hike on the table. French fiscal concerns, however, could limit Euro gains and pull EUR/USD back towards lower levels.

December hike remains in play despite ECB pause

"EUR/USD recovered above 1.1200 after hitting a 17-month low at 1.1105 following yesterday’s ECB policy decision. The ECB paused and tempered tightening expectations. The ECB kept rates on hold at 2.50% as was widely expected but pushed back against the nearly 75bps of tightening implied by markets over the next twelve months."

"Nevertheless, resilient Eurozone economic activity and inflation projected to remain above target for an extended period keep a December rate hike to 2.75% firmly in play (86% priced in). Indeed, real GDP rose 0.4% q/q in Q3 vs. 0.6% in Q2, double the consensus forecast, as growth in Spain and Germany offset France’s contraction."

"The ECB leadership change is unlikely to alter the near-term policy outlook and has no material implication on EUR. The ECB Governing Council is not a one-person show; 21 members have voting rights, including six Executive Board members and 15 governors of the national central banks."

"Bottom line, limited policy divergence between the ECB and Fed offers EUR/USD support. However, France’s ongoing fiscal troubles can drive EUR/USD down to 1.1000."

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