FX Spotlight | EUR to be guided higher by forward guidance | Article – HSBC VisionGo

EUR to be guided higher by forward guidance
Finance  ·    ·  6 mins read

  • 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.

Disclosure appendix

This document is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Information in this document is general and should not be construed as investment advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on it, consider the appropriateness of the information, having regard to their objectives, financial situation and needs and, if necessary, seek professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. 
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered here on a principal or agency basis.
Whether, or in what time frame, an update of this information will be published is not determined in advance.
Additional disclosures
  1. This report is dated as at 23 July 2021.
  2. All market data included in this report are dated as at close 22 July 2021, unless a different date and/or a specific time of day is indicated in the report.
  3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
  4. You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund.

Disclaimer

This document is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong and is part of the HSBC Group. This document is for general circulation and information purposes only. This document is not prepared with any particular customers or purposes in mind and does not take into account any investment objectives, financial situation or personal circumstances or needs of any particular customer. HBAP has prepared this document based on publicly available information at the time of preparation from sources it believes to be reliable but it has not independently verified such information. The contents of this document are subject to change without notice.
This document is not investment advice or recommendation nor is it intended to sell investments or services or solicit purchases or subscriptions for them. You SHOULD NOT use or rely on this document in making any investment decision or decision to buy or sell currency. HBAP is not responsible for such use or reliance by you. You SHOULD consult your professional advisor in your jurisdiction if you have any questions regarding the contents of this document.
You SHOULD NOT reproduce or further distribute the contents of this document to any person or entity, whether in whole or in part, for any purpose. This document may not be distributed to the US, Canada or Australia or any other jurisdiction where its distribution is unlawful.
Hong Kong
In Hong Kong, this document is distributed by HBAP to its customers for general reference only. HBAP is not responsible for any loss, damage or other consequences of any kind that you may incur or suffer as a result of, arising from or relating to your use or reliance of this document. HBAP gives no guarantee, representation or warranty as to the accuracy, timeliness or completeness of this document.
Miscellaneous
Notwithstanding this document is not investment advice, please be aware of the following for the sake of completeness. Past performance is not an indication of future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. When an investment is denominated in a currency other than the local currency of an investor, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. Where there is no recognised market for an investment, it may be difficult for an investor to sell the investment or to obtain reliable information about its value or the extent of the risk associated with it.
This document contains forward-looking statements which are, by their nature, subject to significant risks and uncertainties. Such statements are projections, do not represent any one investment and are used for illustration purpose only. Customers are reminded that there can be no assurance that economic conditions described herein will remain in the future. Actual results may differ materially from the forecasts/estimates. No assurance is given that those expectations reflected in those forward-looking statements will prove to have been correct or come to fruition, and you are cautioned not to place undue reliance on such statements. No obligation is undertaken to publicly update or revise any forward-looking statements contained in this document or any other related document whether as a result of new information, future events or otherwise.
The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates and their respective officers and/or employees, may have interests in any products referred to in this document by acting in various roles including as distributor, holder of principal positions, adviser or lender. The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates, and their respective officers and employees, may receive fees, brokerage or commissions for acting in those capacities. In addition, The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates, and their respective officers and/or employees, may buy or sell products as principal or agent and may effect transactions which are not consistent with the information set out in this document.
© Copyright 2021. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this document may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.
HSBC
HSBC