July ECB Cheat Sheet: hot currency
Euro can be prominent in policy discussions
Extensively, the Euro has not been a significant consideration for the ECB in the post-Pandemic period, as long as it remains in the range of 1.00-1.20 to the USD. When Euro fell under parity in 2022, Hawkish ECB’s attitude was widely interpreted – including by us – as intended for partly to support the currency to reduce import inflation. With EUR now approaching the upper limit of this range following strong appreciation, FX has returned to the ECB focus, because it is reflected not only in the attention of market participants but deeper the official communication of the governing council members.
During the interview at Sintra, ECB Vice President Luis de Guindos was unusual to mention the specific level for EUR/USD: 1.20 – Beyond which things could be more “complicated”. We will not receive this comment on the nominal value, because the level of change is generally more important than the specific level for the central bank. But Guindos is not the only governing board member who is willing to put the exchange rate on the table, and (as shown below) Euro is very strong based on trade.
We think the relatively calm July meeting can display some increase in supervision about how comfortable policy makers with other euro rally. The consideration of FX may not be towards official communication, but can help tilt balance to a more dovish overall tone.
ECB has limited control over EUR/USD
If indeed the ECB wants to do something about Euro, the good news is that Beta Eur/USD for short -term exchange in our model is the highest since 2022. The bad news is less than half of beta in 2022. And remember EUR/USD reacts to the differential price of ECB: Fed. The ECB is at the end of its easing cycle, while the scope for the surprise on the Dovish side by The Fed is much bigger.
Simply put, the price of Fed-therefore data-data has an asymmetrical greater impact on EUR/USD, even when it does not include other dominant US-centered themes (de-dollarisation, the flow of USD value, policy uncertainty, debt sustainability issues). While support for a more dovish attitude to limit the power of the euro may arise, the effective FX results will depend more on the FED than the ECB itself.
For what concerns this meeting, expect from whatever ECB is mentioned from the EUR strength which is calculated to reach the Euro. EUR/USD remains overbought and our tactical preferences remain bearish, regardless of ECB communication.
Rates may be sensitive to ECB taking about trading tension
The market price is very anchored around the ECB landing zone of 1.75%, but the next cutting time is still debated. For this meeting, the probability of zero was valued and this increased to around 50% for September. But with a lot of uncertainty, we doubt the market will get more clarity about the time during this meeting.
One of this uncertainty is trade tension, where the market seems to have changed even more sensitive this week. Therefore, taking the risk of potential tariffs can be a trigger for material rate movements. A more confusing tone can make the market reconsider the 1.5%landing zone, as happened after the ‘Liberation Day’. On the other hand, with the risk of inflation decreases mentioned above, more optimistic taking is not possible to move interest rates.
Source: Ing
