The economists of Commerzbank analyze the outlook for the Euro after the ECB’s rate hike last week.
A much weaker Euro risks increasing upward pressure on inflation
Crucially, the ECB gave exactly what was largely expected for the September central bank meetings: a fairly clear signal that rate hikes will come to an end. In doing so, the ECB accepted a certain level of risk. After all, it had to lead the way, since the Fed and the other major central banks don’t meet until this week. If these central banks send a less clear signal that the end of rate hikes is imminent for them as well, the Euro could again come under greater depreciation pressure..
This would constitute a problem for the ECB, since a much weaker Euro would also risk increasing upward pressure on inflationwhich would undoubtedly worry the central bankers of the ECB given the continued uncertainty about the future evolution of inflation rates.
It’s comforting to know that’s exactly what we – and the market – don’t expect to happen. With the exception of the Bank of Japan and the Riksbank, of course, the most we expect from central bank decisions this week is all or nothing, and that is what has already been anticipated. Therefore, any deviation from these forecasts will lead to more notable fluctuations in exchange rates.
Source: Fx Street
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