Morning Brief – EURUSD lifeline?

Charles Porter
Tue 12 Sep 2023

EURUSD lifeline?

Contrary to where market consensus would have read EURUSD at the start of the year, the currency pair has failed to find support as it grinds ever lower. The recent peak of 1.12 was short lived and largely macroeconomic factors have swiftly and confidently forced the Euro-Dollar currency pair to retreat. The causality between those all-important interest rate expectations and macroeconomic realities evidenced largely by data has been strong and one way: from the data to the expectations. The communications of central bank officials at both the ECB and the Fed have had some but relatively short impacts upon the direction of the currency pair. However, with subdued expectations moving into the ECB decision this Thursday, the Euro and thus EURUSD could be offered a lifeline.

Largely as a result of weak data across the Eurozone, markets have gradually priced out their expectations for a hike this week from the ECB. However, there remains some degree of tightening priced in for the remainder of the year showing, the expectation for a pause from the ECB at this meeting and perhaps some token hike to stamp out inflation later in the year. Despite the data, based upon recent ECB rhetoric and central bank logic it seems plausible that the Bank could surprise markets this week to deliver a hike. The result upon inflation and interest rate expectations would seem to come as a cheap benefit from dragging forward a hike by one or more meeting dates versus following market expectations and delaying the final adjustment(s) to rates.  

There is a growing feeling in markets that the strong US Dollar is undermining efforts in nations other than the United States to control their inflation rates. Weaker domestic currencies more often than not have the effect of allowing inflation to be imported domestically. Whilst the ECB will of course not be seeking to manipulate the Euro with their policy decision, it certainly wouldn’t be an unwelcome short-term impact to stem the flow of value in the single currency. Despite donning my rosiest pair of tinted spectacles, it still seems premature to call the floor in EURUSD. A hike on Thursday would certainly provide a bounce to EURUSD but it would likely fade away. Instead, the currency pair should remain subdued until US rate expectations for next year moderate.

Discussion and Analysis by Charles Porter

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