FX Spotlight | EUR to be guided higher by forward guidance | Article – HSBC VisionGo
- The ECB did not deliver any major surprises in its first post-strategy review decision, keeping current policy tools unchanged
- The ECB forward guidance signals no rate hikes until at least end-2023
- A lack of super dovishness from the ECB may see the EUR reversing higher over the near term, in our view
The ECB has kept its dovish policy stance in its first post-strategy review meeting
On 22 July, the European Central Bank (ECB) did not deliver any major surprises in its first post-strategy review decision. As widely expected, the central bank has strengthened its rates guidance following the outlook of the strategic review. The current policy tools were also kept unchanged, including the key policy rates, EUR1.85trn pandemic emergency purchase programme (PEPP), and the asset purchase programme (APP), with net purchases continuing at a monthly pace of EUR20bn. The overall tone of the policy stance remains dovish, but the specifics of the new forward guidance may point to some room for the EUR to bounce over the near term, in our view.
The ECB forward guidance signals no rate rises until at least end-2023
In its new format, the ECB statement highlights that rates will remain at current or lower levels “until it sees inflation reaching two percent well ahead of the end of its projection horizon and durably for the rest of the projection horizon”. With the ECB currently expecting inflation at just 1.4% in 2023 – and only have 1.7% in their “mild” COVID-19 scenario analysis (NB – these ECB forecasts were made before the Delta variant became widespread) – it will be some time before it will have a forecast that shows inflation for a long enough period of time at target (or even slightly above). As such, this should contribute to market expectations for the first possible rate hike further out, in line with our economists’ view.
However, with no specific date given to this guidance on rates (for example as the Reserve Bank of Australia (RBA) has used in Australia), any super-dovish expectations may be somewhat disappointed. There is still potential for changes to future forecasts, meaning the date for tightening could conceivably come forward if the ECB’s forecasts evolve in a more hawkish manner.
The EUR may have overshot to the weak side, and so a lack of super-dovish stance should see the EUR reversing higher over the near term, in our view
This may provide some element of support for the EUR over the near term. It is worth bearing in mind that since the EUR-USD hit is recent peak at the end of May around 1.2250, the movements in rate differentials between Eurozone and US may not have supported the almost 4% decline in the EUR versus the USD. As such, we think the broader trends still imply the EUR may have overshot to the weak side following the Federal Reserve’s (Fed) June meeting and during the recent bout of risk-off behaviour. A lack of aggressive dovish follow through by the ECB could be the catalyst for a reversal higher, in our view.
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This report is dated as at 23 July 2021.
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