Euro: ECB tightening supports currency – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad expects the European Central Bank (ECB) to deliver another 25 bps hike this week, taking the policy rate to 2.50%, supported by above-target Eurozone inflation and a firmer growth outlook. Haddad sees the swaps curve fully pricing rates at 3.00% over twelve months, arguing that the macro backdrop is EUR supportive as policy moves toward the upper neutral range.

ECB outlook seen EUR supportive

"The ECB is widely expected to follow June’s 25bps hike with another on Thursday, taking the policy rate to 2.50%. Above target Eurozone inflation and a firmer growth outlook give the ECB scope to raise rates."

"The ECB will also publish its September macroeconomic projections. We don’t expect material changes to the Eurozone GDP and inflation forecasts. Improving leading economic indicators and slightly softer core inflation are broadly offset by higher energy prices."

"Brent crude oil and natural gas prices are 8% and 44% higher, respectively, than at the time of the June ECB meeting."

"Bottom line, the Eurozone macro backdrop argues in favor of bringing the policy rate closer to the upper end of the ECB’s 1.75%-3.00% neutral range. The swaps curve more than fully price in ECB rates at 3.00% in the next twelve months, which is EUR supportive."

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